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FTC Announces Final Rule Banning Noncompete Agreements

in Business, Employment, News

On April 23, 2024, the U.S. Federal Trade Commission announced its long-awaited final rule regarding noncompete agreements. The FTC had issued a proposed rule in January 2023 and received more than 26,000 comments from the public in response. The final rule effectively bans employers from entering into noncompetes with workers and bans enforcement of most existing noncompetes. The FTC explained its rationale for the rule in a press release, available here, including that noncompetes are an “unfair method of competition” that “tend to negatively affect competitive conditions in labor markets . . . [and] product and service markets, inhibiting new business formation and innovation.”

 The FTC estimates that approximately 30 million workers in the U.S. are subject to noncompete agreements. Nearly all of these existing noncompete agreements will no longer be enforceable once the final rule goes into effect. The final rule defines a noncompete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The ban is broadly inclusive of noncompetes pertaining to employees, independent contractors, interns, volunteers, and other types of workers. There is a limited exception for existing noncompete agreements with senior executives (workers in policy-making positions earning more than $151,164 annually).

Employers will be required to provide notice to workers (other than senior executives) who are currently subject to a noncompete, informing them that the employer will not be enforcing such agreements. Going forward, employers are banned from entering into or enforcing any new noncompetes, even with senior executives.

The final rule will not generally prohibit non-disclosure/confidentiality agreements, noncompete clauses related to the sale of a business entity or ownership interests, or enforcement of noncompetes where the cause of action accrued prior to the effective date of the final rule.

The final rule will become effective 120 days after publication in the Federal Register. Publication is expected to occur within the next several days after the FTC’s announcement, meaning the likely effective date will fall sometime in late August or early September 2024. However, legal challenges have already been filed and more will no doubt be filed, including by the U.S. Chamber of Commerce. Such challenges could delay or prevent the final rule from becoming effective.

In the meantime, employers should work with legal counsel to plan and prepare for next steps should the final rule go into effect, including drafting notices to workers and identifying alternatives to noncompete agreements, such as non-disclosure/confidentiality agreements that effectively protect their interests in the marketplace.

For more information about the FTC’s final rule regarding noncompetes, and guidance for compliance and avoiding legal pitfalls, please do not hesitate to contact Russell Rendall or one of the other employment law attorneys at Weston Hurd LLP.

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