FTC Issues Final Rule Labeling Non-Competes an Unfair Method of Competition

On April 23, 2024, the Federal Trade Commission (FTC) issued the Non-Compete Clause Rule (the “Final Rule”), which states that it is an unfair method of competition – and therefore a violation of Section 5 of the FTC Act – for businesses to enter into non-complete clauses with their employees. The Final Rule will become effective 120 days after publication in the Federal Register (which will likely occur soon). Thus, the Effective Date will likely be in August or September 2024, absent litigation or congressional action.

The Final Rule states that most existing non-compete clauses are no longer enforceable and all non-compete clauses entered into after its Effective Date are unenforceable. There is an exception stating that existing non-competes with senior executives (i.e., those that earn more than $151,164, and "are at the level of a president, chief executive officer or the equivalent, or in a position that has similar authority to a president or officer” and have "policy-making authority”) are grandfathered in and are still enforceable. However, the Final Rule prohibits entering into future non-compete agreements with senior executives.

A non-compete clause is defined as a term or condition which prevents a worker from accepting similar work or operating a similar business after the conclusion of their employment. The Final Rule contains an exception for a non-compete clause entered into pursuant to a bona fide sale of a business.

Notably, the Final Rule does not restrict the use of other restrictive covenants, such as non-solicitation and confidentiality agreements (also referred to as Non-Disclosure Agreements (NDAs)). The FTC opined that, in addition to existing trade secret law, these alternatives “are sufficient to address disclosure of confidential information and concerns related to client business.”

The Final Rule requires employers to notify employees who have previously signed agreements containing non-compete provisions of the Final Rule by the Effective Date, and includes a model notice form that employers can use to inform employees that it will not enforce any non-compete clause against them.

Lawsuits are expected to be filed by business interests to prevent the enforcement of the Final Rule before the Effective Date. Additionally, there is a question of how the FTC will enforce the Final Rule. “Congress has never established a private right of action under section 5 [of the FTC Act], nor has it authorized the [FTC] to recover civil penalties or other monetary relief from parties who engage in unfair methods of competition.” Thus, the FTC is limited to obtaining “an adjudication under section 5(b) [of the FTC Act] or to seek an injunction in Federal court under section 13(b) against a party that has engaged in an unfair method of competition.”

For additional information, please contact Burke Warren partners Rachel Bossard at 312-840-7029 / rbossard@burkelaw.com or Blake Roter at 312-840-7116 / broter@burkelaw.com