Federal Trade Commission Announces New Rule Banning “Non-Competes”

By: Rick Berger and Clint D. Robison

In a purported effort to promote new business formation, raise wages, and lower health care costs, the FTC announced its final rule banning all use of non-compete agreements on April 23, 2024. “With respect to existing non-competes—i.e., non-competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.” The effective date is 120 days from publication in the Federal Register. Agreements entered into prior to the effective date for so-called senior executives will remain in force. Once effective, the new rule would require all employers across the country to notify their employees that any current non-compete provisions for non-senior executives are no longer enforceable.

To justify its sweeping new rule, FTC Chair, Lina M. Khan offered, “noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.” Chair Khan further explained that “the FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.” The FTC’s rationale: non-competes have a negative impact on competitive conditions in labor markets, which in turn inhibits the formation of new businesses and hinders overall innovation.

Litigation will surely ensue, both with respect to the FTC’s authority to ban non-competes in the first place, and by employees seeking to void current non-compete provisions until the courts weigh in and provide guidance. As such, it will be important to monitor the impact of the ban on a state-by-state basis and to ensure compliance with state restrictive covenants.

In the meantime, trade secret laws and non-disclosure agreements will continue to offer employers some measure of protection until the enforceability of the new rule is resolved in court. Despite broad state prohibitions limiting NDA’s and the reach of trade secret laws, the FTC is confident that “both provide employers with well-established means to protect proprietary and other sensitive information.”

https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

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