Federal Trade Commission Approves Nationwide Ban on Noncompete Agreements

Author

Antonio C. Castro

Manager / Partner

Following months of policy debate, on Tuesday, April 23, the Federal Trade Commission (“FTC” or “Commission”) approved a rule that bans non-compete agreements.  FTC Chair Lina Khan first proposed the rule change in January 2023.

Under the FTC’s new rule:

  • Existing non-competes for the vast majority of workers will no longer be enforceable after the rule’s effective date.

  • Existing non-competes for senior executives (defined as workers in a “policy-making position” who earn over $151,164 annually – representing 0.75% of workers, according to the Commission) can remain in force, but employers are banned from entering into or attempting to enforce any new non-compete, even if they involve senior executives.

  • Employers will be required to provide notice to workers (other than senior executives) who are bound by an existing non-compete that they will not be enforcing any non-compete against them.

  • “Worker” is broadly defined as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”

  • The rule does not apply to non-competes if they restrict only work outside the US or starting a business outside the US.

  • The rule does not apply to a non-compete 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.

  • The rule does not apply where a cause of action related to a non-compete accrued prior to the effective date of the rule.

According to the FTC:

  • One-time legal costs related to compliance with the new rule are estimated to total $2.1-3.7 billion.

  • Theoretically, under the final rule, certain litigation costs may fall.  Litigation related to non-competes may decrease because the final rule creates bright line rules, reducing uncertainty about the enforceability of non-competes.

  • On the other hand, litigation costs may rise if companies turn to litigation to protect trade secrets and if that litigation is more expensive than enforcing (or threatening to enforce) non-competes, and/or if firms elect to litigate over what constitutes a non-compete.

  • Employers have several alternatives to non-competes that still enable companies to protect their investments without having to enforce a non-compete.  Trade secret laws and nondisclosure agreements (NDAs), both provide employers with well-established means to protect proprietary and other sensitive information. 

The FTC rule is expected to draw immediate legal challenges.  The rule goes into effect 120 days after publication in the Federal Register—not from the April 23rd announcement.

Should you have any questions or comments, do not hesitate to contact us at Zumpano Castro.