Client Alert April 24, 2024 Dominic T. Clolinger

Federal Trade Commission Issues Ban on Noncompete Clauses

On April 23, 2024, the Federal Trade Commission (“FTC”) voted to approve its final rule (the “Final Rule”) prohibiting any business or person from imposing noncompete clauses on workers, with limited exceptions. As of the Final Rule’s effective date, which will be 120 days after its publication in the Federal Register, noncompete clauses will be treated as an unfair method of competition under Section 5 of the FTC Act.

The Final Rule:

The Final Rule prevents businesses and individuals from entering, enforcing, or asserting noncompete clauses against their “workers.” The term worker is defined to include, but is not limited to, employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors. Businesses and individuals are required to provide notice to workers, other than “senior executives” who are bound by an existing noncompete, that they will not enforce existing noncompetes against them. The FTC has provided model notice language, which can be found here.

Notable Exceptions:

The FTC created a number of limited carveouts to the ban. Without limitation, these exceptions include the following:

  • Franchisees: The final rule is not applicable to a franchisee in the context of a franchisee-franchisor relationship, but does apply to a person who works for a franchisee or franchisor.
  • Senior Executives: The final rule does not apply to existing agreements with senior executives. Noncompete agreements with senior executives entered into after the effective date of the Final Rule will be considered violative of the regulation. A senior executive is an individual who is in a policy-making position and who has total annual compensation of more than $151,164, as detailed further the final rule. Both “policy-making position” and “total annual compensation” are defined in the Final Rule.
  • Bona Fide Sale of a Business: The Final Rule does not apply to a bona fide sale of a person’s ownership interest in a business entity or of substantially all of a business entity’s operating assets.
  • Existing Causes of Action: The Final Rule does not apply where a cause of action against a worker accrued prior to the effective date of the Final Rule.
  • Good Faith: It is not violative of the Final Rule to enforce or attempt to enforce a noncompete clause where the business has a good faith basis to believe the Final Rule is inapplicable. Due to the broad nature of the rule, there will be very limited circumstances where a business’s conduct qualifies as a “good faith basis.”

Non-Solicits and NDAs

The Final Rule does not categorically prohibit non-disclosure agreement (“NDAs”), training repayment agreement provisions (“TRAPs”), and non-solicitation agreements. However, the FTC has warned that if such provisions functionally prevent or penalize the worker from seeking other work or starting a separate business, they may be violative of the Final Rule.  Per the FTC, these will be fact-based inquiries.

Legal challenges are expected and may delay enforcement of the Final Rule. We will continue to monitor developments regarding the Final Rule.  Businesses with specific questions about noncompete clauses should contact Nikole CanuteScott DwyerNate WolfDominic Clolinger, or Kathryn Stegink as soon as practicable.

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