Noncompetes banned? What's Happening at the FTC?

The Federal Trade Commission (FTC) has recently finalized new rules governing non-compete agreements, marking a significant shift in how these agreements will be enforced across the United States. The FTC’s goal in adopting these new rules is workforce mobility and competition. While the rules’ full impact will unfold over time, businesses should prepare now by reviewing their noncompetes.

The FTC's Rule In A Nutshell

The rule bans noncompete agreements.

On April 23, 2024, the FTC voted 3-2 to finalize a new rule targeting noncompete agreements. The rule will take effect on September 4, 2024, 120 days after its publication (the “effective date” as it’s referred to here).

The new rule introduces several important definitions:

Noncompete Clause: Any employment term that prohibits or penalizes a worker for seeking or accepting employment or operating a business after their current employment ends.
Senior Executive: Workers in “policy-making positions” earning at least $151,164 annually.
Policy-making Authority: Final authority to make significant business policy decisions.

Requirements of the Rule

Non-Senior Executives: Existing noncompetes will be deemed unfair competition and thus unenforceable. Employers must provide notice of this change by September 4, 2024.
Senior Executives: Existing noncompetes are allowed if the noncompete was/is in effect before the effective date. Noncompetes after the effective date will be unenforceable.

Notice Requirements

Employers must provide clear and conspicuous notice to affected employees no later than September 4, 2024. This notice can be delivered by hand, mail, or email. The FTC has provided model language for this purpose, which is provided below.

A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:

You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
You may run your own business—even if it competes with [EMPLOYER NAME].
You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

The FTC has published model language in several languages, available here.

Exceptions to the Rule

Bona Fide Sale of Business: The rule does not apply to noncompetes entered into as part of a legitimate sale of a business entity or ownership interest.
Existing Causes of Action: Noncompete causes of action that accrued before the effective date are not affected.

Legal Challenges and Potential Litigation

Like many controversial rule changes, the final FTC rule is expected to face legal challenges on issues like scope and the FTC's authority to regulate noncompetes. Barring an injunction by a federal court, the rule will go into effect in September.

What’s the current state of the law in California regarding noncompetes?

In California, under the California Business and Professions Code § 16600 et seq., non-competes in California were already mostly invalidated with very narrow exceptions for specific situations (e.g. the sale of a business).

Most recently, California AB 1076, effective as of January 1, 2024, makes it unlawful for businesses to include post-employment noncompete clauses in employment-related contracts or require California-based employees to enter into post-employment noncompete, and requires any business to send individualized notices to current and certain former employees that any noncompete agreement or provisions previously reached (including such post-employment noncompetes) are void.

So what should a business do? Recommended Next Steps for Businesses

If you’re a business based in California or that has California-based employees, this FTC rule generally won’t change anything for you. As referenced above, California has legislation almost identical to the FTC rule regarding noncompetes.

These federal rule changes set by the FTC are set to take effect by September. Assuming the FTC rule properly goes into effect, you’ll need to disclose the change to your affected employees using this model language from the FTC and consider adjustments to your current and future employment agreement to remain compliant.

Here Are Ways That You Can Stay Informed and Monitor Compliance

Monitor Legal Challenges: Stay informed about ongoing legal disputes/challenges and their outcomes.
Review Noncompetes: Assess and update existing noncompete agreements with senior executives and other employees.
Explore Alternatives: Consider using non-disclosure agreements, retention/training repayment agreements, customer and employee non-solicitation agreements, and term agreements as alternatives to noncompetes.

For further details and specific advice on your situation, you may wish to consult the compliance guide furnished by the FTC, available here. Archetype Legal PC is also happy to help you understand the implications of these changes and what you might need to do for your own employees or executives.

Feel free to reach out to us via hello@archetypelegal.com to set up a free consultation.

Disclaimer: This post discusses general legal issues and developments, is intended to serve as informational only, and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Archetype Legal PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.