FTC approves final rule banning non-compete agreements

At an open meeting on Tuesday, April 23, 2024, the Federal Trade Commission voted along partisan lines (3-2) to impose a national prohibition on all existing non-competition agreements, subject to minor exceptions. This decision eviscerates decades of state law regarding non-compete agreements and private agreements between millions of employees and their employers.

While McDonald Hopkins’ trade secret, non-compete and unfair competition practice group will elaborate in more detail after a thorough review of the Final Rule, below are the highlights:

1. All existing non-compete agreements for workers other than “senior executives” are invalidated and unenforceable within 120 days of the Rule’s promulgation – April 23, 2024.
2. Existing non-compete agreements with “senior executives” shall remain in effect, but once the final Rule is effective, any new non-competes for “senior executives” will be illegal.
3. Employers must provide “notice” to affected workers that their non-competes are now invalidated, but employers do not need to formally “rescind” them.
4. The Rule does not cover franchisor/franchisee relationships.
5. The Rule is not effective as between “non-profit” employers and their employees, leaving open the potential for the continued enforcement of non-competes with employees of non-for profit health systems by way of example.

Many of the definitions needed will be outlined in the text of the Final Rule, such as which employees constitute “senior executives,” what “notice” employers need to give to affected employees, and how an entity will by analyzed in order to be a true “non-for-profit” and thus exempted, among others.

Legal challenges are sure to follow, as foreshadowed by the two Republican dissenters.  The principal challenge is that the FTC is usurping Congress’ Article 1 power to be the sole federal legislator, and not an agency of the executive branch, such as the FTC. Bloomberg Law has noted that the U.S. Chamber of Commerce is expected to file a legal challenge as to the constitutionality of the Rule this week.

McDonald Hopkins will be following developments on this closely and continue to provide updates as the Final Rule is promulgated and further examined.