May 14, 2024 General Employment Issues

FTC Bans all Non-Competition Agreements

The Federal Trade Commission (FTC) recently issued a final rule banning non-competes for the vast majority of the workforce in the U.S. Many states already discourage the use of non-competes, limiting the duration, geographic area, and/or types of employees that may be subject to such agreements. However, the FTC’s broad, nationwide ban affects virtually all employers.

What Is in the Final Rule?

New non-competition agreements executed after the effective date of the final rule are prohibited with a few exceptions (discussed below). 

Pre-existing non-competes for most workers will also be unenforceable once the rule goes into effect. Notably, there is a carve-out for senior executives, defined as workers earning more than $151,164 annually and who are in policy-making positions. Pre-existing non-competes with such senior executives will remain in effect, but new ones are banned.

By the effective date of the rule, employers must give notice to all affected workers that their non-compete will not be enforced. The FTC provided model language employers can use when giving notice to workers. 

Are There Exceptions to the Ban?

The ban on non-competes applies to anyone who works for a for-profit employer and to independent contractors (except for existing non-competition agreements with senior executives as noted above). However, nonprofit organizations may continue to use non-competes. Limited use of non-competes is also allowed in franchisor-franchisee agreements.

There is also an exception for non-competes “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.”

Why Have Non-Competes Been Banned?

The FTC determined that non-competition agreements violate Section 5 of the FTC Act as an unfair method of competition. The Commission claims that non-competes prohibit employees from changing jobs and starting businesses, reduce wages, lead to market concentration, and increase prices for consumers.

What Are Some Alternatives to Non-Competes to Protect Employers?

Employers can use non-disclosure agreements (NDAs), non-solicitation agreements, and agreements requiring workers to repay training expenses to protect their business. However, the restrictions in such contracts cannot be so severe as to function practically as a non-compete.

Federal and state trade secret laws may also provide remedies against employees who misappropriate proprietary information.

Finally, employers should develop policies regarding employee access to sensitive information and restrict access with appropriate technology.

When Does the Ban Go into Effect?

The ban is effective 120 days after publication of the final rule in the Federal Register, which is on or around August 21, 2024. However, legal challenges to the rule may delay implementation of the rule.

What Steps Should Employers Take Now?

While lawsuits have already been filed challenging the ban, employers should start preparing. Employers should determine who has a non-compete and draft an appropriate notice to them. Further, employment agreements that contain a non-compete provision will need to be updated. Employers should also consult counsel to determine other ways to protect their business, such as with NDAs or other agreements.

Please feel free to contact any of our attorneys if you have questions about the final rule or need assistance with employment agreements, NDAs, or other guidance.

NOTICE: Material provided on this website has been prepared by Kauff McGuire & Margolis LLP solely for general informational purposes, and it is not intended to and does not constitute legal advice. Material provided on the website is not privileged and does not create an attorney-client relationship with the Firm or any of its lawyers.