FTC Noncompete Ban Generates Uncertainty for Businesses

On April 23, 2024, the Federal Trade Commission (FTC) issued a rule banning noncompete agreements. The rule is quite broad—it bans virtually all new noncompete agreements and voids most preexisting noncompete agreements as well. Mounting legal challenges to the new FTC rule make it increasingly unclear whether the rule will take effect as planned on September 4, 2024.

Noncompete agreements are contracts whereby an employee agrees not to compete with their employer after their employment period is over. The FTC claims that noncompete agreements suppress wages and prevent new ideas and businesses from forming. By banning noncompete agreements, the FTC estimates that it will reduce health care costs, spur new business formation, and increase innovation and worker earnings.

Though the Biden administration and the FTC had previewed their intent to restrict noncompete agreements for some time, the sweeping nature of the final rule caused an uproar. The FTC rule applies broadly not just to formal noncompete agreements, but also to any other clause that “functions to prevent a worker from” working for a competing entity. The ban on new noncompete agreements also applies to all workers, including independent contractors, interns and volunteers, and senior executives. There is a carveout for senior executives with existing noncompete agreements, but existing noncompete agreements with all other employees will be void once the rule goes into effect in September. The only other major exception is for noncompete agreements consummated during a merger or acquisition transaction.

There are currently at least three lawsuits challenging the FTC rule, the most prominent of which is brought by the U.S. Chamber of Commerce. The lawsuits assert that the FTC’s authority under Section 5 of the FTC Act does not extend to enacting a nationwide prohibition of noncompete agreements—an area that had previously been regulated by each state. Some of the lawsuits also raise constitutional and other claims.

Though the lawsuits raise the possibility that the FTC rule will not go into effect as planned in September, there are steps businesses can take now to prepare for the potential impact of the rule. First, take stock of existing noncompete agreements for senior executives and make any desired changes before the FTC rule goes into effect. Second, ensure that you have robust protections in place for company trade secrets, confidential information, and information technology security. In the wake of the implementation of the FTC rule, though employees will have more freedom to move to competitors, trade secret law will be a backstop in preventing them from sharing company secrets with competitors.


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