The U.S. Federal Trade Commission (FTC) Bans Most Non-Competes

The FTC has issued a final rule banning all non-compete clauses entered into on or after the rule’s effective date except those related to the bona fide sale of a business. Additionally, the rule invalidates all existing non-compete clauses except for those related to “Senior Executives.” Non-competes for “Senior Executives” which are in existence prior to the effective date of the rule are not invalidated. “Senior Executives” are defined as those individuals earning at least $151,164 and in a “policy-making position.”

The rule is applicable to any worker “whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”

For workers who are not “Senior Executives” employers are required by the rule to notify those employees that the non-competes they signed are no longer enforceable. The FTC has provided a sample language that may be used by employers to notify affected employees.  

The FTC rule does not generally ban or invalidate non-solicitation agreements, confidentiality/non-disclosure agreements, non-recruitment agreements so long as such agreements are not acting as a ban on an individual’s ability to work or begin a business.

The rule has already come under attack from various employer groups including the U.S. Chamber of Commerce who has filed a lawsuit seeking to postpone the rule’s effective date and ultimately invalidate the rule. It is expected that challenges to the rule will delay the effective date, however, employers are encouraged to review employment agreements, severance agreements and all other documents which may include non-compete clauses and evaluate whether the party meets the definition of a “Senior Executive.”  

Unless delayed by court rulings or other action, the final rule is scheduled to be effective 120 days following its publication in the Federal Register.