FTC Adopts Rule Banning Most Non-Compete Clauses

By: Kristin Goulet, Esq.

April 27, 2024

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that bans non-competes nationwide. According to the FTC, this final rule would result in people having greater freedom to change jobs, start new businesses, or even bring new ideas to the market.

In essence, the final rule views non-competes as unfair methods of competition. It applies to all “workers,” which is broadly defined to practically encompass any person who is employed, regardless of position or compensation. And so, moving forward, it will be deemed unfair competition to prohibit a worker from, penalize a worker for, or in any way prevent a worker from working after his or her current employment ends. In short, as soon as a worker’s current employment ends, whether through termination or resignation, that worker is free to seek employment with the former employer’s competition or start a competing business.

This ban will take effect 120 days after the final rule is published. Any employer who has previously entered into a non-compete with a worker is required to notify that worker that the non-compete will no longer be enforceable and to make clear that the worker is free to compete with their current employer after the worker’s employment ends. This notice must be provided prior to the effective date of the ban.

As with any rule, there are exceptions. First, it is not unfair competition to restrict a person who sells a business through a bona fide sale from competing with the purchaser of that business. Second, the ban does not apply when a cause of action related to the non-compete predates the effective date of the ban. Third, there are some limited to exceptions to allow existing non-competes with senior executive level staff making in excess of $151,000 a year to remain in effect. Lastly, there is no unfair competition when a person enforces or attempts to enforce a non-compete and that person has a good faith basis to believe that the ban is inapplicable. With the FTC’s intended broad application of the ban, it is difficult to imagine a situation in which the last exception would apply.

When the FTC invited comments prior to issuing the final rule, representatives of small businesses and the Small Business Administration (SBA) Advocacy expressed great concern that the ban would spell the end for many small businesses. These parties believe that small businesses would suffer and ultimately fail, because their current workers would either leave to become their competitors or be poached by competitors. The FTC found none of their arguments convincing. Furthermore, according to the FTC, there are alternatives to a non-compete that would still protect employers’ interests without stifling competition—non-disclosure agreements, non-solicitation agreements, non-recruitment agreements, or any combination of the foregoing.

As of now, it would seem that non-competes will no longer play a role in employment relationships. However, with an opponent like the SBA or the US Chamber of Commerce it is actually unclear whether this final rule will in fact be final. There have already been lawsuits filed against the FTC related to the rule and now the Courts will be tasked with determining whether the rule will go into effect.

Nevertheless, at BPE Law Group, our team of experienced attorneys stands ready to assist clients in navigating through the upcoming challenges this new rule may present.

The information presented in this article is not to be taken as legal advice. Every situation is different. If you are facing a legal issue of any kind, get competent legal advice in your state immediately so that you can determine your best options.

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