FTC Approves Final Rule That Would Ban Almost All Non-Competes

By Isaac A. Linnartz and Zebulon D. Anderson

On April 23, 2024, the Federal Trade Commission voted 3-2 to publish a proposed final rule that would ban nearly all worker non-competes. If the proposed final rule goes into effect, it will present a major legal change affecting workers and businesses across the country. That said, the rule will not go into effect until 120 days after it is published in the Federal Register, and it already is subject to non-frivolous legal challenges that likely will delay and ultimately may invalidate the rule.

The proposed final rule has three major components. First, it would prospectively ban all new worker non-competes starting on the rule’s effective date. The proposed final rule applies not only to employees, but to all “workers,” including independent contractors. Second, it would make non-competes that already are in place on the rule’s effective date unenforceable for all workers other than certain “senior executives.” The regulatory definition of senior executives is complicated and includes requirements that the person be in a “policy-making position” (as defined in more detail in the rule) and receive total annual compensation of at least $151,164 (as calculated under the rule’s specific provisions). Third, it would establish that employers violate the rule by attempting to enforce an invalid worker non-compete or representing that any worker who is not a “senior executive” is subject to a non-compete. The proposed final rule would still allow reasonably tailored non-solicitation and confidentiality provisions as long as those provisions do not prevent or penalize seeking other work.

In a departure from the FTC’s original proposal, the proposed final rule would not require formal recission of existing non-compete provisions or agreements, but would require employers to provide individualized, written notice to workers (other than certain “senior executives”) by the rule’s effective date that their existing non-competes will no longer be enforced. In another partial departure from the original proposal, the proposed final rule would not apply to non-competes agreed to in connection with the sale of a business.

Under its terms, the proposed final rule will go into effect 120 days after it is published in the Federal Register. Even so, the proposed final rule still faces multiple hurdles. First, it could be overturned by Congress through a joint resolution of disapproval. Second, it could be temporarily or permanently derailed through a legal challenge. Opponents of the rule already have filed lawsuits seeking immediate, nationwide injunctive relief to prevent it from going into effect, as well as a final court ruling striking down the rule. Finally, changes in presidential administration and in the composition of the FTC could result in further changes to the rule or how it is enforced. Smith Anderson’s Non-Compete and Trade Secrets group will continue to monitor the rulemaking process and provide further updates on significant developments concerning the proposed final rule.

If you have questions related to this alert, please contact Zeb Anderson, Isaac Linnartz, or another lawyer within the firm’s Non-Compete and Trade Secrets or Workplace Law practice areas.