An employer’s practical guide to the FTC’s Non-Compete Rule

This article is the latest in a series from McDonald Hopkins' Trade Secret, Non-Compete, and Unfair Competition team covering the FTC's decision to impose a national prohibition on all existing non-competition agreements, subject to minor exceptions.

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The Federal Trade Commission’s (FTC) Non-Compete Rule (Rule), announced April 23, 2024, has left employers uncertain of what to expect in the coming days, weeks, and months.  If the Rule goes into effect, all existing non-compete agreements with workers will be immediately invalidated, with the exception of those with senior executives. (Click here for insight on the definition of terms such as “workers” and “senior executives” under the Rule.) After the Rule goes into effect, no new non-compete agreements will be permitted, with few exceptions.

In sum, the FTC has cast the net as wide as possible.

McDonald Hopkins’ Trade Secret, Non-Compete, and Unfair Competition attorneys have been following all the latest developments since the FTC unveiled the Rule. The team has put together the following insights regarding the immediate impact on employers and what to expect next.  

Immediate impact of the FTC's rule banning non-compete agreements

1. Employers should first understand that while the Rule may go into effect 120 days from its publication in the Federal Register (approximately four months from the end of April 2024), it also may not. That is, the Rule does not have immediate effect, and existing non-competes are still enforceable subject to applicable state law. While employers should prepare over the next four months for a world where non-compete agreements are illegal, there is nothing to implement today.
2. The Rule requires notice to covered workers that their non-competes will not be enforced. Employers should start identifying the workers who may need to receive notice if the Rule goes into effect and consider the logistics of making notice. The term "workers" is defined broadly to include employees, independent contractors, externs, volunteers, apprentices, or a sole proprietor providing services to a customer. The notice to workers that non-competes will be unenforceable must be “clear and conspicuous,” and the FTC provided model language.
3. Remember that existing non-competes with senior executives will remain enforceable after the Rule goes into effect. This includes non-compete agreements currently in effect and those agreed to anytime before the Rule goes into effect. A senior executive is defined as an individual earning over $151,164 who is in a “policy making” position. Employers can expect that C-suite executives and corporate officers will likely qualify under this definition. The debate will come as an employer moves down the management scale. After the effective date of the Rule, any new non-competes with senior executives will be illegal. Employers should evaluate whether they want to enter into non-compete agreements now with senior executives in the event the rule goes into effect.
4. Employers should consider their entire unfair competition playbook and evaluate less restrictive measures that they either now have available or may need to implement should the Rule go into effect. In order to protect confidential information and client relationships, employers should consider reasonably tailored non-solicitation or non-disclosure agreements as potential alternatives to non-compete agreements. In many instances, these types of clauses will already be in employers’ existing restrictive covenant agreements, but a review should be done nonetheless.
5. The Rule includes an exemption for litigation that “accrued” prior to the effective date, so employers considering filing claims may want to do so within the next 120 days.
6. Employers should expect that even if the Rule is delayed or struck down by the United States Supreme Court, state legislatures or Congress may be prompted to adopt restrictions on non-competes. Such unsuccessful measures have been introduced by Congress before, such as the Workforce Mobility Act, and this Rule may be the impetus to revive such legislative efforts. Therefore, a review of restrictive covenants is recommended on an annual basis to ensure that they comply with the current law and to ensure enforceable covenants are in place in the event a state or Congress adopts new restrictions.

What’s next for employers

1. Importantly, the Rule has not gone into effect and will not for at least 120 days from when it is published in the Federal Register.
2. The U.S. Chamber of Commerce and other business groups have already filed lawsuits challenging the legality of the Rule – click here to read our analysis of this filing. More lawsuits will unquestionably follow. As set forth by the U.S. Chamber, the primary and compelling argument is that the FTC has usurped its congressional authority under the FTC Act and promulgated what is, in essence, “federal legislation” and thus trampled on Congress’ inherent authority under Article 1. The Chamber has filed for a stay and/or preliminary injunction to prevent the Rule from taking effect. If granted, this request would delay the Rule’s implementation pending likely review by the Supreme Court.

Given the above, employers’ uncertainty surrounding the FTC’s sweeping Non-Compete Rule is understandable and justified. If you have questions regarding the Rule or your company’s current suite of restrictive covenants, contact your McDonald Hopkins attorney or any member of McDonald Hopkins' Trade Secret, Non-Compete, and Unfair Competition team.

We will continue to monitor developments and keep employers updated.