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Briefing

FTC Ruling on Banning Non-Compete Agreements

The Federal Trade Commission (FTC) has issued a final ruling regarding the ban on non-compete agreements.

The final rule states that it is considered an unfair method of competition to (1) enter into or attempt to enter into a non-compete clause; (2) enforce or attempt to enforce a non-compete clause; or (3) represent that a worker is subject to a non-compete clause. A "non-compete" clause is defined as a term or condition of employment that prohibits a worker from seeking or accepting work with a different employer after leaving their current employment, or from operating a business after leaving their current employment.

This rule applies retroactively, so there is a notice requirement for existing non-compete clauses. If a non-compete clause has been issued, the worker must be provided with a clear and conspicuous notice that the clause will not be enforced against them. However, no notice is required for non-compete clauses that exist with "Senior Executives." A "Senior Executive" is defined as an individual who earned more than $151,164 in annual compensation in the preceding year and has policy-making authority. Policy-making authority refers to the final authority to make policy decisions that control significant aspects of a business entity or common enterprise, excluding authority limited to advising or exerting influence over such decisions or having final authority only for a subsidiary or affiliate of a common enterprise.

There are three other exceptions provided in the final rule. First, a ban on non-compete clauses does not apply if the clause is entered into as part of a bona fide sale of a business, including the sale of a business entity, ownership interest, or substantially all of the business's operating assets. Second, if there is an existing cause of action due to non-compliance with a non-compete clause, this new rule does not apply. The third exception applies when there is a good faith belief that this new rule is not applicable.

Regarding local regulations on non-compete clauses, the FTC's final ruling states that it does not annul or exempt anyone from complying with any state statute, regulation, order, or interpretation applicable to non-compete clauses. Therefore, if a state already prohibits the use of non-compete clauses, the state's laws are not preempted. In California, non-compete clauses have already been deemed unlawful. Additionally, recent legislation, including California Senate Bill 699 (Chapter 157, Statutes of 2023) and Assembly Bill 1076 (Chapter 828, Statutes of 2023), imposes civil liability on employers who violate these laws, providing additional remedies for employees.

Some employers use non-solicitation agreements and non-disclosure agreements to protect their business interests. However, if these agreements are used as non-compete agreements, they may be considered void under the FTC's rules. Therefore, whether a non-solicitation agreement or a non-disclosure agreement is considered a non-compete agreement depends on the specific facts of the case. It is important to draft these agreements narrowly to protect confidential business practices without being considered overly broad and potentially treated as non-compete agreements by a court.

The effective date of this new rule is 120 days after it is published in the Federal Register, or September 4, 2024. However, there are ongoing legal challenges seeking to enjoin the rule. Some employers have argued that the FTC does not have the authority to issue and enforce this rule. If these legal challenges succeed, the FTC's ruling may become ineffective. However, employers should also consider their local state laws to determine if non-compete clauses are void.

Keenan is not a law firm and no opinion, suggestion, or recommendation of the firm or its employees shall constitute legal advice. Clients are advised to consult with their own attorney for a determination of their legal rights, responsibilities, and liabilities, including the interpretation of any statute or regulation, or its application to the clients’ business activities.