FTC Rule Bans Non-Compete Clauses

On Behalf of | May 20, 2024 | Firm News

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final Non-Compete Clause Rule (the “Rule”) that bans businesses, in most instances, from imposing post-employment and post engagement non-compete agreements upon workers. Under the Rule, non-compete agreements are considered “unfair methods of competition” under Section 5 of the FTC Act. The Rule defines workers broadly and covers employees, independent contractors, interns, volunteers, and other types of statuses. In addition, The Rule is scheduled to take effect within 120 days from the date of publication in the Federal Register and will preempt state laws that are contrary to the Rule; however, it is likely that the effective date of the Rule will be delayed, due to pending lawsuits filed against the FTC challenging the Rule, including a lawsuit filed by the US Chamber of Commerce.

Assuming the new Rule takes effect, existing non-compete agreements will no longer be enforceable, except for those between a businesses and senior executives (a title defined by the Rule), and no future non-compete agreements will be legally permissible against any worker or senior executive.

Prior to the effective date of the Rule, businesses are required to issue a written notice to all workers subject to existing non-compete agreements, informing workers that after the effective date, the existing noncompete agreement is no longer legally enforceable against them. The Rule provides model language for a written notice and is 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 CHOOSE 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 [link to the final rule landing page]. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalong, and Korean, are available at [URL on FTCs website].

Delivery of a written notice must be hand delivered to a worker, or sent via email, mail, or text message to a worker’s current or last known personal address, or a mobile telephone number belonging to the worker. A business is not required to provide notice to a worker in instances where a business has no record of a worker’s street address, email address, or mobile telephone number.

The Rule does not apply to:

  • A non-compete agreement entered into by a person for the bona fide sale of a business entity, of the person’s ownership interest in a business entity, or all or substantially all of a business entity’s operating assets;
  • Existing causes of actions,
  • Enforcement of a non-compete agreement based on a good faith basis and belief that the Rule is inapplicable; and
  • Nonprofit entities.1

A business’s failure to comply with the Rule may result in injunctive relief and other remedies available to the FTC under Section 5 of the FTC Act. Further, only the FTC can enforce the Rule, workers do not have any private right to action to enforce the Rule.

This article is neither an exhaustive review of the Rule, nor is it to be considered legal advice. This article is meant to be a general overview of the Rule.

If you need legal advice or have questions about the Rule, and how it may impact your circumstances, please contact David Mandel ([email protected]) or Matthew DiMaio ([email protected]).

1 It is worth noting that the FTC has indicated that it may enforce the Rule against nonprofit’s designated for tax purposes as nonprofit entities, but organized to make a profit for members, or that are profit making enterprises.