Last year we wrote a blog discussing a new rule proposed by the Federal Trade Commission (FTC) to prohibit the use and enforcement of non-compete clauses as an unfair method of competition. On April 23, 2024, the FTC issued its final rule on the matter, which will go into effect September 4, 2024.
Key Provisions of the Final Rule
The final rule provides that it is an unfair method of competition for a person to, or attempt to, enter into or enforce a non-compete clause or represent that a worker is subject to a non-compete clause if the non-compete clause is “a term or condition of employment that either prohibits aworker from, penalizes a worker for, or functions to prevent a worker from (A) seeking oraccepting work in the United States with a different person where such work would begin after theconclusion of employment that includes the term or condition; or (B) operating a business in theUnited States after the conclusion of the employment that includes the term or condition.”
Broad Definition of “Worker”
The term “worker” is broadly defined to cover just about any person who provides or has provided services to another person: “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the work is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”
Exceptions for Senior Executives
The final rule created an exception to this broad definition for workers in policy making positions who received total annual compensation of at least $151,164 in the preceding year (as calculated in accordance with the final rule), identified in the final rule as “Senior Executives.” For Senior Executives, non-compete clauses in effect prior to the effective date of the final rule will remain valid and enforceable. But their differing treatment ends there. The entry and enforcement of new non-compete clauses after the effective date of the final rule is prohibited for Senior Executives, just like any other type of worker.
Exceptions for Business Sales
The final rule also provides an exception for persons who enter into non-compete clauses pursuant to a bona fide sale of:
(i) a business entity.
(ii) an ownership interest in a business entity.
(iii) all or substantially all of a business entity’s operating assets.
Non-compete clauses in effect prior to the effective date of the final rule will remain valid and enforceable, and new non-compete clauses may be entered and enforced after the effective date of the final rule.
Other Notable Exceptions
A few other notable exceptions to the applicability of the final rule include:
(i) a good faith exception where there is a good-faith basis to believe that the final rule is inapplicable.
(ii) non-compete clauses that apply only during a worker’s employment are permitted, provided that they do not restrict a worker from seeking other employment while employed.
(iii) causes of action related to non-compete clauses that accrued prior to the effective date of the final may be pursued and enforced.
Final Thoughts
Most importantly, the final rule does not expressly prohibit the various other types of agreements or clauses utilized to protect legitimate business interests, such as non-disclosure agreements, non-solicitation agreements, and the like. While not expressly prohibited, such agreements and clauses must be carefully drafted because they could run afoul of the final rule if deemed to be the functional equivalent of a non-compete clause.
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