On April 23, 2024, the Federal Trade Commission issued a final rule banning noncompete agreements nationwide. The FTC determined that noncompetes constitute unfair competition in violation of Section 5 of the FTC Act. The final rule, which preempts conflicting State law, is aimed at promoting competition, increasing innovation, and fostering new business formation.
Noncompetes are contractual terms that seek to prohibit or prevent workers from (1) looking for or accepting work with a different employer, or (2) operating a business after the conclusion of previous employment. Given the stifling effect on competition and the freedom of movement of workers, multiple states, including California, have long-held noncompete agreements to be unenforceable, subject to limited exceptions.
The final rule does not limit or affect enforcement of State laws that restrict noncompetes where the State laws do not conflict with the final rule, such as California, but it preempts State laws that conflict with the final rule.
Existing Noncompete
Under the final rule, existing noncompetes nationwide will no longer be enforceable after the effective date, except for those entered into with senior executives, which can remain in effect, if permitted under state law. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.
Employers will be required to provide notice to workers, other than senior executives, who are bound by an existing noncompete, that they will not be enforcing any noncompetes against them. The FTC has included model language in the final rule that employers can use to provide the required notice to workers.
Moving Forward
After the effective date employers may not enter into or attempt to enforce any new noncompetes, even if they involve senior executives.
Exceptions
The final rule does not apply under the following situations:
noncompetes entered into by a person pursuant to a bona fide sale of a business entity;
where a cause of action related to a noncompete accrued prior to the effective date;
Enforcing or attempting to enforce a noncompete or to make representations about a non-compete where a person has a good-faith basis to believe that the final rule is inapplicable.
Effective Date
The final rule will become effective 120 days after publication in the Federal Register.