FTC Bans Noncompete Agreements

On April 23, 2024, the Federal Trade Commission (FTC) issued a rule banning noncompete agreements. If the rule survives legal challenges, it will take effect 120 days after publication in the Federal Register. 

As we discussed last year, the FTC has decided that noncompete restrictions are an unfair method of competition and therefore unlawful under Section 5 of the Fair Trade Commission Act. After receiving over 26,000 public comments on its proposal to ban noncompetes, the FTC’s Democratic majority voted in favor of a nationwide ban. The ban ignores the existing efforts of every state to significantly restrict noncompetes as well as the legitimate, protectable interests of employers. 

If/when it becomes effective, the rule does the following:

• Prohibits nearly all employers from entering into any new noncompete restriction with any worker (including independent contractors); 
• Renders all existing noncompete restrictions unenforceable except for those with senior executives (someone earning more than $151,164 annually who is in a “policy making” position);
• Requires employers to notify workers with noncompete restrictions that the noncompete restriction is no longer in effect and will not be enforced; and
• Provides an exception for noncompetes between the seller and buyer of a business.

The rule does not apply to non-solicitation or confidentiality restrictions unless they function to prevent a worker from getting a new job or starting a business. It also does not apply to any noncompete restriction which is currently being litigated. Finally, it cannot apply to any employer that is outside the FTC’s jurisdiction, which may include banks, savings and loan institutions, and federal credit unions, as well as certain nonprofits and carriers. 

The FTC’s rule has already been challenged. Yesterday, the U.S. Chamber of Commerce filed a lawsuit in a Texas federal court challenging the FTC’s authority to issue the rule. Another lawsuit has been filed by a Texas tax services company, Ryan LLC. More lawsuits are expected. 

Employers should pay attention to the legal challenges to determine whether it appears the rule will be blocked by the courts or whether it could go into effect. Proactive employers who want to be prepared for the worst-case scenario could start reviewing records to determine which current and former employees have existing noncompete agreements as the notice required by the new rule must be issued to the worker by the effective date of the rule. It may also be wise to carefully consider who your senior executives are as the FTC’s definitions are intentionally quite narrow. 

Stay tuned to the KZA Employer Report for updates and contact a KZA attorney if you have questions or would like to start preparing to comply with the rule. 

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.