On April 23, 2024, the Federal Trade Commission (the “FTC”) announced a new Rule that bans most non-compete agreements as an unfair method of competition. The new Rule, which will go into effect at the end of August 2024, addresses both existing non-compete agreements, and non-compete agreements entered into after the Rule becomes effective.
For existing non-compete agreements, it is an unfair method of competition (i) to enforce or attempt to enforce such agreements, or (ii) to represent that a worker is subject to a non-compete. However, excluded from enforcement for existing non-compete agreements are (a) those agreements entered into in connection with the sale of a business, and (b) those agreements with “senior executives.” The Rule defines a “senior executive” as someone in a policy-making position whose total compensation is at least $151,164 per year. We expect a substantial number of disputes arising concerning whether an executive, even if highly compensated, meets the FTC’s “policy-making position” standard.
After the effective date of the Rule, it will be an unfair method of competition to enter into or attempt to enter into a non-compete agreement, except in connection with the sale of a business. Also, after the effective date of the Rule, there will be no exception for “senior executives.”
Additionally, companies and entities that have existing non-compete agreements with employees (including independent contractors) that are deemed to be an unfair method of competition pursuant to the Rule must provide “clear and conspicuous notice” to such employees before the effective date of the Rule that such employees’ non-compete agreements will not, and cannot legally, be enforced.
The Rule also provides that it is intended to supersede State law to the extent that such law would permit conduct deemed by the FTC to be an unfair method of competition.
Although not addressed directly in the Rule, the FTC made clear in its 500 plus page comments that although the Rule does not necessarily include non-solicitation, no-hire, no-business, and non-disclosure agreements, such agreements, if sufficiently restrictive, could be considered to be a non-compete agreement. We expect extensive litigation in this area, where former employees will contend that their non-solicitation, no-hire, no-business, and non-disclosure agreements are sufficiently restrictive to effectively be non-compete agreements, and therefore are unenforceable as an unfair method of competition.