On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule regarding non-compete agreements.  The FTC’s rule operates as an almost complete ban on such agreements. Unless enjoined by a court, the rule will become effective 120 days after its publication in the federal register.

In short, the rule prohibits agreements that directly prohibit or penalize a worker from seeking or accepting competing work or operating a competing business.  In addition, the rule also prohibits any agreement that effectively “functions” to prevent a worker from doing so. An example the FTC provides in its commentary on the rule of an agreement that could “function” to prevent competition is an overly broad non-solicitation of customers provision.  Thus, while restrictive covenants such as  non-solicitation of customers and employee provisions and non-disclosure provisions are not expressly prohibited by the rule, the rule leaves open some room for a court to find that an overly broad restriction effectively functions as a non-compete that is barred by the rule.

Except in limited circumstances, the rule will apply retroactively. In other words, employers will be prohibited not only from entering into new non-compete agreements with workers, but also from enforcing existing non-compete agreements.

There is a limited exception that allows the enforcement of non-compete agreements for “Senior Executives” who signed the agreement before the effective date of the rule.  The definition of “Senior Executive” is very narrow.  To qualify for this exception, the employee must make more than $151,164 in annual compensation and must be in a “policy making position.”  A “policy making position” means the employer’s president, CEO or equivalent officer, or other officer who has “final authority to make policy decisions that control significant aspects of a business entity.” Merely “exerting influence” over such decisions or having the ability to make decisions for “only a subsidiary or affiliate of a common enterprise,” do not qualify a worker to be a “Senior Executive.”

Even for “Senior Executives,” an employer may only enforce agreements that were entered into prior to the effective date of the rule. Once the effective date has passed, employers will be prohibited from entering into new non-competes with any employee.

For existing employees (other than Senior Executives) who already have non-compete agreements, the rule imposes a notice requirement on employers to notify these employees that their non-compete agreements cannot and will not be enforced.

Multiple lawsuits have already been filed challenging this rule and seeking to enjoin it from taking effect.  We will be monitoring the litigation and reporting on important developments.