On May 7, 2024, the Federal Trade Commission published its finalized Non-Compete Clause Rule (https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule) (“Rule”). The Rule prohibits employers in the U.S. from imposing post-employment non-compete clauses on workers or seeking to enforce such clauses as of September 4, 2024.

Note that the Rule has encountered several legal challenges since its publication. As of July 3, 2024, at least one federal court has preliminarily enjoined the FTC from enforcing the Rule until after adjudication on the merits. (See Ryan LLC v. Federal Trade Commission: https://natlawreview.com/article/texas-federal-judge-partially-blocks-ftc-ban-non-competes.) As such, the Rule’s final effects are highly subject to change.

To learn more about how the Rule may affect your business, please see below.

A. Non-Compete Clause Rule: Four Takeaways

The Rule bans any agreement between a worker and an employer in the U.S. which meets the following criteria: (1) is a term of employment; (2) “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work, or operating a business; and (3) applies after the worker’s engagement with the employer ends.

• The Rule will apply to non-employees. The FTC has made clear that the Rule uses the term “worker” to ensure that the Rule will capture agreements with natural persons who are not employees, including (without limitation)independent contractors, interns, and volunteers, among others.
• The Rule will apply to agreements that are not non-compete agreements. Outside of traditional non-compete agreements, the Rule also prohibits post-employment covenants such as:
  • Non-disclosure provisions that span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.
  • Forfeiture-for-competition provisions.
  • Severance arrangements in which the worker is paid only if they refrain from competing with their former employer.
  • Training repayment arrangements that require a worker to repay training costs, where the repayment is not reasonably related to the training costs.
  • Non-solicitation provisions which broadly prohibit the worker from soliciting customers of the company, if they effectively prevent a worker from seeking or accepting other work from such customer after their engagement concludes; however, this is .
• The Rule is slated to take effect on September 4, 2024. Note, however, that businesses and trade associations across the country have filed suit against the FTC, seeking a stay of the Rule. Continued litigation could delay the Rule’s implementation and enforcement.
• Some non-compete terms will remain enforceable once the Rule takes effect. In addition to the exceptions discussed in later sections, employers can continue to enforce non-compete terms (1) effected before September 4, 2024, with “senior executives” of the company, or (2) based on a cause of action which accrued before September 4, 2024.

B. What personnel qualify as “senior executives” under the Rule?

“Senior executive(s)” are workers who: (1) have “policy-making authority” for the entire organization, and (2) received compensation exceeding $151,164 in the preceding year.

• Policy-making authority: This term means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.”
  • Examples of persons with policy-making authority: President, chief executive officer, and other persons with similar levels of policy-making authority for the whole business.
  • Persons who do not have policy-making authority:
    • Positions that only have the ability to “advis[e] or exert influence over policy decisions”;
    • Positions that only have “final authority to make policy decisions for … a subsidiary of or affiliate of a common enterprise.”
    • Senior executives of an individual division or other sub-part of a business.
  • Compensation threshold: Note that the calculation of a senior executive’s compensation is still subject to clarification. The FTC has indicated that fringe benefits such as board, lodging, payments for medical insurance, payments for life insurance, contributions to retirement plans, and other similar benefits do not count towards the compensation threshold; however, this guidance conflicts with the Rule, which cites provisions that only refer to board and lodging.

C. Does the Rule have any exceptions?

Yes. Non-compete terms that meet the following criteria are likely to remain enforceable:

• The non-compete only restricts work outside of the U.S. or starting a business outside of the U.S.
• The non-compete is effected as part of the terms for the bona fide sale of a business.
• The non-compete is effected in the context of a franchisee-franchisor relationship.
• The non-compete is with an organization that is not organized to carry on business for profit (ex: 501(c)(3) organizations). Not all tax-exempt organizations are exempt from the Rule—for example, for-profit healthcare entities, which are profit-making enterprises based on their actual operations and goals, remain subject to the Rule despite being tax-exempt.
• The non-compete falls within an industry-specific exception from the Federal Trade Commission Act. Banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act are not subject to the Rule.
• The non-compete only applies during the term that the worker is engaged by the company. For example, the FTC has noted that non-competes effective during a fixed service term, as well as non-competes in effect during a “garden leave”, are not prohibited because they are not post-employment restrictions.

D. What are the risks of failing to comply with the new rule?

Using non-competes in violation of the Rule will constitute an “unfair method of competition” under Section 5 of the FTC Act. Violations of the FTC Act can result in fines, penalties, and injunctive relief, depending on the nature of the violation.

Note, however, that the Rule does not supersede existing state laws which restrict or ban non-competes. As of the date of this article, thirty-three states have restricted how non-competes can be used, and four states (California, North Dakota, Minnesota, Oklahoma) have banned the use of non-competes entirely. Risks may vary by state level. For example, California has implemented a private right of action enabling employees to sue an employer which enters into a prohibited non-compete; employees can seek injunctive relief, damages, and reasonable attorney’s fees and costs.

Businesses should consider state laws applicable to their business in addition to complying with the Rule.

E. What steps should I take to Comply with the non-compete ban?

Employers should take any necessary steps to ensure that they’re able to comply with the Rule by September 4, 2024. General recommendations include:

• Compiling a list of impacted current and former workers. Employers will need to provide notice to each worker who is subject to a non-compete in violation of the Rule if the employer has either a mailing address, email address, or cell phone number for the affected worker.
• Considering whether any impacted workers qualify as “senior executives”.  Given the limited exception for senior executives who have entered into non-competes before the Rule’s effective date, companies may also wish to consider whether any personnel that qualify as ‘senior executives’ should sign non-competes before the Rule takes effect.
• Providing notice to all workers subject to a prohibited non-compete that the non-compete clause will not be enforced against the worker before September 4, 2024. The notice must identify the person or entity who entered into the non-compete clause with the worker, and must be provided to the worker via mail, e-mail or text message. The FTC has included model languagethat employers can use to communicate with workers.
• Assessing whether any existing agreements with post-employment covenants will be affected by the Rule. For example, non-compete terms are often a condition of post-employment compensation (ex: post-employment vesting of equity compensation or severance pay). Whether a company must continue to provide compensation once a worker’s post-employment non-compete terms cease to be enforceable will vary, depending on the terms of compensation and the scope of the restrictive covenants.
• Determining whether other agreements used to protect company trade secrets and confidential information should be revised. Non-competes have historically been a critical tool in reducing the risk that former workers will use trade secrets to their own benefit after leaving the company. Similarly, broad non-disclosure terms have allowed businesses to protect confidential information that may not rise to the level of a trade secret. As such, businesses should look beyond the traditional non-compete agreements to determine their next steps. 

F. Where can I learn more about the Rule?

• Fact Sheet on FTC’s Proposed Final Non-compete Rule: https://www.ftc.gov/news-events/news/press-releases/2024/04/fact-sheet-ftcs-proposed-final-Non-compete-rule
• The FTC’s Non-compete Clause Rule: A Compliance Guide for Businesses and Small Entities: https://www.ftc.gov/system/files/ftc_gov/pdf/Business-and-Small-Entity-Compliance-Guide-updated.pdf
• Recording of the FTC’s Compliance Webinar on the Final Non-compete Rule, held on May 14, 2024: https://vimeo.com/946313922
• State Non-compete Law Tracker: https://eig.org/state-noncompete-map/

For additional assistance, you can also contact Sean McChesney and Gwen Wei at sean@focallaw.com and gwen@focallaw.com.