On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule banning noncompete agreements in the United States, effective September 4, 2024. Immediately after the FTC approved the final rule, multiple entities filed lawsuits challenging the rule and seeking injunctions to postpone the effective date. Currently it is unclear if and when the rule will go into effect, but employers should be prepared for the rule to become effective.
Scope of the Rule
The FTC rule prohibits any noncompete clause or agreement that prohibits, penalizes or otherwise prevents any worker (including employees, contractors, interns, volunteers, etc.) from seeking or obtaining work with a different employer in the U.S. following the termination of employment. If implemented, the FTC rule will apply to both new and existing agreements with only two exceptions:
- Existing noncompete agreements entered before the rule becomes effective with “senior executives,” defined as workers earning more than $151,164 who are in a “policy-making position.”
- Noncompete agreements entered pursuant to a bona fide sale of a business entity.
What Happens to Existing Noncompete Agreements?
The FTC rule does not void existing agreements that contain noncompete clauses, but it makes the noncompete clauses ineffective. Further, employers are required to provide notice to any worker subject to a noncompete clause that will become unenforceable, prior to the date the rule become effective. The FTC has also provided model language that may be used to provide such notices, as follows:
A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:
- You may seek or accept a job with any company or any person- even if they compete with [EMPLOYER NAME].
- You may run your own business- even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].
The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit https://www.ftc.gov/legal-library/browse/rules/noncompete-rule. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at https://www.ftc.gov/legal-library/browse/rules/noncompete-rule.
Next Steps
Employers should review existing employment agreements to determine whether they contain any noncompete provisions that would be prohibited under the FTC rule. If so, employers should be prepared to send out notices to each affected employee prior to the date the rule becomes effective.
Employers should also review their existing template employment agreements to ensure they do not contain language that is prohibited under the FTC rule.
We have deep counseling and litigation experience in these areas. If you have any questions or follow up, please feel free to contact us.