Non-compete Agreements to be Banned, Limited Exceptions

In late April, the Federal Trade Commission (“FTC”) issued a controversial new rule that bans all non-compete clauses for every worker nationwide across all industries – with very limited exceptions. The rule, if not stopped by a lawsuit, will take effect on or about September 1, 2024. After the effective date, employers also have an affirmative duty to notify workers (including former employees) that their existing non-compete clauses are no longer in effect. The U.S. Chamber of Commerce opposes the new Rule and has filed suit in the Eastern District of Texas to block it.  Read the complete Federal Register rule.

What is a non-compete agreement? The term “non-compete clause” is defined broadly as any contractual term that prohibits a worker, penalizes a worker for, or functions to prevent a worker from seeking or accepting work with a different person or operating a business, after the conclusion of the worker’s employment with the employer. The Rule does not prohibit other post-employment restrictive covenants, like non-disclosure or non-solicitation clauses.

Who is covered by the Rule? The Rule covers all “workers,” which includes not just employees, but also independent contractors, volunteers, and interns. The definition excludes franchisees in the context of a franchisee-franchisor relationship. The Rule itself does not exempt any specific employers, although some employers (such as certain nonprofit entities) are outside of the FTC’s jurisdiction.

What about Senior Executives? Employers will be able to enforce existing non-compete clauses only with “senior executives,” (as defined in the Rule) and only for those agreements that are in place on the date of the Rule. The only exception is for non-competes made in connection with the sale of a business. Specifically, the Rule does not apply to a non-compete clause “that is 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.”

Although it is not certain that the new rule will survive a legal challenge, all employers should review any existing non-compete agreements and consider revising agreements to focus on trade secrets and non-solicitation protections. More resources about the enforceability of non-compete agreements are located at law firm White & Case’s Resource Center.

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