News

FTC Issues Final Rule to Ban Non-Compete Agreements

Yesterday, the Federal Trade Commission (“FTC”) voted to issue a proposed final rule (“Rule”) to ban virtually all non-compete clauses in employment contracts. This sweeping action began in January 2023 when the FTC issued the proposed rule in draft form. The Rule is now set to take effect 120 days after publication in the Federal Register.

The key takeaways from the Rule are:

• Employers are prohibited from entering non-compete agreements with all categories of employees after the Rule’s effective date.
• Existing non-compete agreements are allowed to remain in place only for senior executives, who are defined as employees in “policy-making” positions who earn more than $151,164 annually.
• For all other employees, existing non-competes will no longer be enforceable as of the Rule’s effective date.
• Employers must provide notice to their employees, by the effective date, that their non-competes are no longer enforceable.
• The Rule applies to employees, independent contractors, interns, externs, and volunteers.
• There is an exception allowing non-competes in connection with the sale of a business.
• Non-solicitation provisions are not directly impacted by the Rule.
• The Rule does not apply to non-profits.

The Rule defines “Non-compete clause” broadly to include “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The FTC made clear this definition does not categorically prevent the use of non-disclosure agreements or non-solicitation agreements. However, it uses a functional test to consider whether such agreements are “so broad or onerous” that they essentially function as an unenforceable non-compete.

What Does This All Mean for Your Business?

The Rule does not take effect for at least 120 days, so there is no need for any immediate action. The Rule is also certain to be subject to extensive litigation, as the U.S. Chamber of Commerce has already said it plans to file suit. This means an injunction could be issued preventing the Rule from going into effect, at least temporarily. In the meantime, however, all employers should begin to identify those employees who have non-competes and determine whether they are “senior executives.” For those employees who are not senior executives, employers should begin to consider whether an NDA or non-solicitation agreement may be necessary to protect their businesses.

Written By: Trip Umbach, Breanna Young, and Cole Gresham

---

Starnes Davis Florie will continue to follow and provide updates on any developments or lawsuits relating to the Rule. If you have any questions about the Rule or how best to protect your business in light of it, please contact us.

Trip Umbach   205-868-6072 or tumbach@starneslaw.com

Breanna Young   205-868-6020 or byoung@starneslaw.com

Cole Gresham 205-868-6042 or cgresham@starneslaw.com

---

This information is not intended to provide legal advice, and no legal or business decision should be based on its content. No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers. Read full disclaimer.