On the Horizon – Understanding The FTC’s Final Rule Banning Most Non-Competes

On April 23, the Federal Trade Commission (“FTC”) voted to issue a final rule banning non-compete clauses nationwide with limited exceptions (the “Final Rule”).  The unpublished Final Rule is available here. The FTC’s Fact Sheet with a synopsis of the Final Rule is available here.  So what does this mean for employers now? And what can employers do to prepare?

The “Highlights” of the Final Rule:

• Persons are prohibited from enforcing or entering into any non-compete with Workers (other than Senior Executives) on or after the Effective Date;
• Persons may enforce existing non-compete agreements with Senior Executives, but are prohibited from enforcing any new non-competes with Senior Executives after the Effective Date;
• The Final Rule includes an exception that allows a non-compete between the seller and buyer of a business;
• By the Effective Date, Persons must notify affected Workers that their non-compete is no longer in effect and will not be enforced.

Below are answers to common questions to ensure employers remain compliant with the Final Rule.

When Does The Final Rule Go Into Effect?

The Final Rule takes effect 120 days from the date it is published in the Federal Register (the “Effective Date”).  So if nothing else changes, the Final Rule will likely be in effect mid-to-late August 2024.  However, we anticipate several legal challenges to be lodged against this rule, which will likely further delay the Effective Date.

What Is A “Non-Compete”?

Under the Final Rule, non-compete means a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work, or operating a business in the United States with a different person after the conclusion of their employment.  While it remains to be confirmed, given this broad definition, this rule likely eliminates not only explicit non-competition agreements, but also non-solicitation and overbroad confidentiality agreements.  

Which “Persons” Are Covered By The Final Rule?

The Final Rule does not use the term “employer,” the Final Rule instead covers any “Person” which means “any natural person, partnership, corporation, association, or other legal entity within the [FTC’s] jurisdiction, including any person acting under color or authority of State law.”  The FTC’s jurisdiction is very broad, but does not include non-profit entities and some financial institutions.  So nearly all for-profit employers are covered by the Final Rule. 

Who is a “Worker”?

A “Worker” is defined broadly under the Final Rule.  Most importantly it covers all employees, unpaid volunteers, and independent contractors.  This is a significant departure from current state law bans on non-competes which arguably did not apply to independent contractors.  This will likely be a focus of many of the incoming legal challenges to the Final Rule. 

Who Is A “Senior Executive”?

A “Senior Executive” means a Worker who:

(1) was in a policy-making position; and

(2) earned at least, or had annualized earnings of $151,164 in the preceding year.

The Senior Executive’s total annual compensation includes salary, commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during that 52-week period.  Total annual compensation does not include board, lodging and other benefits payments. We expect more guidance on what a “policy-making position” is in the coming weeks.

Does The Final Rule Apply To Persons Selling A Business Entity?

No.  The requirements of the Final Rule shall not apply to a non-compete entered into by a Person pursuant to a bona fide sale of a business entity, of the Person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.  Importantly, the Final Rule does not define what a “bona fide sale” is or what “all or substantially all” means in the context of a sale.  California law uses similar language, so we anticipate a similar standard will apply nationwide.  However, this will likely be a source of future litigation.

What Are The Notice Requirements? 

The Person who entered into the non-compete with the Worker must provide clear and conspicuous notice to the Worker by the Effective Date that the Worker’s non-compete will not be, and cannot legally be, enforced against the Worker. 

The notice to the Worker must: (1) identify the Person who entered into the non-compete with the Worker; and (2) be on paper delivered by hand to the Worker, or by mail at the Worker’s last known personal street address, or by email at an email address belonging to the Worker, including the Worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the Worker.  The FTC’s model notice is available here.

However, if a Person that is required to provide notice has no record of a street address, email address, or mobile telephone number of a Worker, they are exempt from the notice requirement with respect to that Worker.

What Should Employers Do Now?

The FTC noted that, “All employers would need to do to comply with the rule is to stop enforcing existing noncompetes with workers other than senior executives, provide notice to such workers, and stop entering into noncompetes with all workers going forward.”  This is an oversimplification and employers should not only ensure compliance, but look to their confidentiality and trade secret agreements.  If the Final Rule becomes effective, these agreements will be employers’ first line of defense to make sure their proprietary information remains protected.

We will continue to keep employers aware of any updates or enforcement challenges regarding the Final Rule.  Please reach out to your Stradling attorney if you would like assistance with the Final Rule and reviewing your current agreements regarding confidentiality and trade secret protections.