Earlier this week, the Federal Trade Commission issued a Final Rule banning noncompete agreements nationwide.  Until this point, the law on noncompetes varied from state to state.  Some states’ laws were quite favorable to noncompetes.  Others, namely California, banned them altogether.  With this development, the federal government follows California’s lead.  Noncompetes are rendered unenforceable – nationwide.   

According to the FTC’s Chairperson, “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 noncompetes are banned.” Agree or disagree, it’s vital to know how the new Rule works and when it takes effect.  Here’s what you need to know.

When does the Rule take effect?

September 4, 2024

Exactly what agreements does the rule prohibit?

Obviously, the Rule bans the vast majority of noncompetes.  Except in the limited circumstances identified below, they are prohibited.  Period. 

What about non-solicitation agreements, non-disclosure agreements, and other restrictive covenants? The Final Rule bans these other forms of restrictive covenants when they practically function as noncompete agreements. The Rule provides that non-disclosure clauses operate as non-competes and are thus banned, “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.” Likewise, non-solicitation agreements are banned to the same extent as noncompetes “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”

In other words, the more an agreement practically limits worker mobility, the more likely it is to be prohibited by the Rule.

What about noncompetes already in existence?

With limited exceptions, the Rule applies retroactively, meaning that not only are parties prohibited from entering into new noncompete agreements, but existing noncompetes are rendered invalid as well.  With regard to retroactivity, the Rule does contain an exception for certain senior executives – those who make at least $151,164 in annual compensation and are employed in a “policy-making” position for the business.  While businesses cannot enter into new noncompetes with such executives, existing ones remain enforceable.

The rule also does not serve to bar lawsuits for violations of noncompetes where the breach of the noncompete occurred prior to the effective date of the Rule.  In other words, at least for the next 120 days, workers subject to noncompetes would be well-advised to continue to abide by them.  Also, existing lawsuits over noncompetes are not rendered moot and may proceed.

Are noncompetes still allowed under any circumstances?

As with any Rule, there are exceptions.  Some involve certain industries excepted from the Federal Trade Commission Act, like banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act.  The most notable exception, however, involves noncompetes entered into in connection with the sale of a business.  Such agreements are still permitted under the Rule. 

Is this actually going to happen?

Remember a few years ago when lawyers like me were telling businesses that the DOL issued a rule drastically raising the salary threshold for employees to be rendered exempt under the FLSA?  Remember how that never actually happened because the federal courts found that the DOL did not have the authority to issue such a rule?   Well, the same thing may happen here.  Within 24 hours of the FTC’s Rule on noncompetes being published, multiple lawsuits were filed challenging the FTC’s authority to issue the Rule.

So, where does that leave things?  Businesses should absolutely take note of the FTC’s Rule and prepare for its enactment, while at the same time following the progress of the cases challenging it. 

Conclusion

For the time being, note the Rule and the potential changes it seeks to bring to the way American businesses do business.  At this point, whether or not such changes actually come to pass is in the hands of the courts.  More to come….

Editorial note: This article has been updated to provide the Effective Date of September 4, 2024, as provided in the FTC’s publication of the Rule on May 7, 2024.