New FTC Rule Bans Non-Competition Agreements in all but a Few Limited Circumstances

By Masud Labor Law

April 24, 2024

On April 23, 2024, the Federal Trade Commission (FTC), in a 3-2 vote along partisan lines, approved a final rule which essentially bans non-competition agreements nationwide.  According to the FTC majority, entering into non-competition agreements with workers is an unfair method of competition which violates Section 5 of the FTC Act.  The FTC decision will go into effect 120 days after it is officially published in the Federal Register.

As a result of the FTC’s rule, all for-profit employers will be prohibited from entering into any form of a non-competition agreement.  Significantly, the final rule applies not only to employees, but also to subcontractors.  The rule is broad and applies to all forms of non-competition agreements that in any way penalizes an individual for competing.

Significantly, it is important to note that the FTC’s final rule is retroactive in its application, making existing non-competition agreements with current and former employees unlawful.  Also, employers are required to provide written notice to individuals subject to non-competition agreements (i.e., current and former employees) that the non-competition agreement will no longer be enforceable.  

There are a few exceptions to the FTC’s final non-competition rule.  For instance, the final rule does not apply to certain banks, savings and loan institutions, credit unions, common carriers, air carriers, or any other entities not subject to the FTC’s jurisdiction.  Non-competition agreements signed before the effective date of the final rule with individuals who qualify as “senior executives” remain in effect and enforceable.  A “senior executive” is defined as an employee who is in a “policy-making position” and earns more than $151,164 per year.  Non-competition agreements entered into as a part of a bona fide business sale will continue to be enforceable so long as certain criteria are satisfied.  

The new rule does not prohibit an employer from preventing an employee from competing while the employee is employed with the employer.  Also, the FTC’s final rule does not appear to cover non-solicitation agreements.  Additionally, since the FTC’s authority only extends to for-profit businesses, the rule does not affect non-competition agreements entered into by non-profit organizations.

It is anticipated that the United States Chamber of Commerce will take immediate steps to seek a temporary restraining order and emergency injunction to challenge the FTC’s decision.  Additionally, lawsuits challenging the FTC’s final rule are also expected to be filed in the next few weeks.  These lawsuits will likely argue that the FTC does not have the unilateral authority to ban non-compete agreements.  This is the same argument that the two dissenting FTC commissioners made in yesterday’s decision.

Masud Labor Law Group will continue to monitor developments on the FTC’s final rule and its impact, and will provide updates.  In the meantime, if you have questions, please do not hesitate to contact us.

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