RIA Compliance Blog
On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule that drastically changes the employment landscape by banning most types of noncompete provisions nationwide and rendering some existing ones unenforceable. The rule was adopted following a review of the non-competition landscape by the FTC. That review of noncompetes and their impact on the employment market and US economy was extensive. The FTC estimated that 1 in 5 Americans are subject to noncompetes as part of their employment.[i] In total, the FTC received over 26,000 comments regarding the proposed ban on noncompetes, over 25,000 commentors supported the proposed ban on noncompetes.[ii]
The final rule prohibits employers from entering into new noncompete agreements as of September 4, 2024, the rule’s effective date. Additionally, existing noncompete provisions are unenforceable as of the effective date, except with regards to certain employees considered “senior executives.” To be considered a “senior executive,” an individual is required to earn more than $151,164 and must be in a policy-making position as a result of their employment. If an existing noncompete is no longer enforceable after the effective date, the new rule requires the employer to notify the employees that the noncompete is no longer in effect and is unenforceable. To assist with this notification provision, the FTC has provided model language to help facilitate the notice to employees impacted.
Finally, the FTC’s new rule provides an exception to the general noncompete ban in situations between the buyer and seller of a business. This exception applies to the bona fide sale of a business, an individual’s ownership of a business, or a substantial portion of the business’ assets.
In practice, the FTC estimates that the noncompete ban will lead to over 8,500 new businesses each year, will lead to workers earning an average of $524 more each year, reduce health care costs over the next decade, and lead to more innovation in the marketplace.[iii] It will be some time before the actual results can be analyzed, but the largest immediate impact is likely to be the rise in nondisclosure agreements (“NDAs”). Historically, noncompete provisions have been justified by recognizing a business’ legitimate interest in protecting its trade secrets and proprietary information. While this legitimate interest in protecting sensitive information has not waivered, the noncompete ban now means that such interest must be protected using alternative means, such as an NDA.
To date, at least three lawsuits have been filed against the FTC as a result of the noncompete ruling.[iv] The lawsuits represent businesses of varying sizes, but all generally challenge the FTC’s ability to create the rule, the constitutionality of the rule, and the constitutionality of the FTC. All of the lawsuits seek to vacate the new FTC rule. Whether by design or happenstance, the filing of the lawsuits in different circuits increases the chance that there will be circuit split, leading to review by the appellate courts. It might not be until the Supreme Court has had a chance to review the new rule and associated lawsuits that the full impact of the noncompete ban is realized.
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[i] FTC Announces Rule Banning Noncompetes, Federal Trade Commission (2024), https://www.ftc.gov/newsevents/news/ press-releases/2024/04/ftc-announces-rule-banning-noncompetes (last visited May 8, 2024).
[ii] Id.
[iii] Id.
[iv] See, Ryan, LLC v. Federal Trade Commission, 3:24-cv-986, United States District Court for the Northern District of Texas, filed April 23, 2024; Chamber of Commerce for the United States of America et al. v. Federal Trade Commission et al., 6:24-cv-00148, United States District Court for the Eastern District of Texas, filed April 24, 2024; ATS Tree Services, LLC v. Federal Trade Commission, et al., 2:24-cv-1743, United States District Court for the Eastern District of Pennsylvania, filed April 25, 2024.