The Federal Trade Commission (FTC) issued a final rule banning the future use of non-compete agreements on workers throughout the United States on April 23, 2024.
What exactly happened?
The final rule concludes that non-compete clauses violate Section 5 of the FTC Act, a federal statute first passed back in 1914. The FTC issued a proposed rule banning non-competes back in January 2023. After reviewing over 26,000 public comments, the Commissioners of the FTC voted 3-2 on April 23, 2024 to approve the final rule.
Does the Final Rule have any exceptions?
Yes, the final rule makes a critical distinction between senior executives and other workers. For senior executives (defined as workers earning more than $151,164 annually who are in a “policy-making position”), preexisting non-compete agreements can remain in place and be enforced. However, for other workers who do not meet the definition of senior executives, preexisting non-competes cannot be enforced. Additionally, the final rule prohibits entering into future non-competes with any workers (including senior executives) after the effective date.
Separately, the final rule does not apply to non-competes entered into by a person as part of the sale of a business entity. Therefore, the seller of a business could agree to certain non-compete provisions within an asset purchase agreement or similar contract.
Is this binding law?
Not yet. The final rule will not be effective until 120 days after its publication in the Federal Register. Even then, lawsuits vigorously challenging the FTC legal authority are expected. Several business groups and politicians questioned the FTC’s authority to invalidate contracts when the proposed rule was first released last year. Perhaps in response to anticipated legal challenges, the 570 page final rule includes significant portions dedicated to argument and legal citations supporting the FTC’s position that it has the legal authority to ban these types of contract without using the normal legislative process. On April 24, 2024, the U.S. Chamber of Commerce and others filed a lawsuit in federal court in Texas challenging the rule. Whether the Court will enter an injunction temporarily or permanently preventing enforcement of the FTC’s rule remains to be seen.
What Should Businesses Do Now?
Business owners and executives should monitor the publication of the final rule and any legal challenges in the coming days, especially since the final rule requires that businesses provide notice to employees that the business will not enforce any existing non-compete as of the effective date. Businesses should consult with legal counsel to determine if their preexisting non-competes remain enforceable, as well as similar contracts relating to the solicitation of customers and the protection of confidential information. Gunster’s Labor & Employment Practice Group will provide regular updates on this topic.
Roger W. Feicht is a Board-Certified litigator with Gunster’s Labor and Employment Practice Group. He can be reached at [email protected].
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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