FTC Rule Bans Non-Compete Agreements Nationwide

On Tuesday, the Federal Trade Commission (“FTC”) issued its long-awaited final rule regarding non-compete agreements. The FTC determined that non-compete agreements are an unfair method of competition and, therefore, a violation of the FTC Act. Once the rule is effective, employers may not enter new non-compete agreements with employees or enforce existing non-compete agreements against former employees, other than senior executives. The rule only applies to businesses that are subject to the FTC Act, which generally does not include non-profit corporations.

The rule has a few exceptions to the non-compete ban, which are outlined below:

1. Senior Executives: Existing non-compete agreements with senior executives remain enforceable. However, employers may not enter new non-compete agreements with senior executives. A senior executive is a worker earning more than $151,164 annually who is in a “policy-making position.” The FTC makes clear that this exception is very narrow. The definition is meant to include high-ranking positions such as the President or Chief Executive Officer of an organization, and the FTC estimates that less than 1% of workers in the country meet this definition.
2. Sale of a Business: The ban on non-competes does not apply to non-compete clauses that are entered as part of a sale of a business entity, a person’s ownership in a business entity, or substantially all of a business entity’s operating assets.
3. Current Cause of Action: If you have a cause of action currently pending regarding a former employee’s violation of a non-compete agreement, you may still pursue the cause of action.

Prior to the rule’s effective date, employers must provide notice to employees (other than senior executives) who are currently bound by a non-compete provision that the employer will not be enforcing the non-compete provision. The FTC has provided a model notice available here.

The rule is set to go into effect 120 days from its publication in the Federal Register. However, it is expected that various business groups will quickly file suit to challenge the rule, which will delay the effective date.

While non-compete agreements may be in limbo, employers can still use confidentiality agreements, non-solicitation agreements, and federal and state trade secret laws to protect their interests. But do not forget to check for any state-specific restrictions regarding confidentiality and non-solicitation agreements.