What does the FTC’s vote to ban non-competes mean for my deal?

On April 23, 2024, following a 90-day public comment period, the Federal Trade Commission (FTC) voted 3-2 to issue a final rule reflecting their vote to classify non-compete clauses as a violation of Section 5 of the FTC Act, thereby banning most non-compete clauses for workers nationwide.

While enforcement will likely be delayed by legal challenges— the U.S. Chamber of Commerce has stated its intention to file a legal challenge as early as today—companies that have traditionally used non-competes should begin preparing for the final rule’s effectiveness. This would include identifying existing agreements affected by the final rule, identifying which of the existing agreements will require rescission, and which will remain enforceable. Companies should also begin exploring alternatives to non-competes that may satisfy the company’s legitimate business objectives, including the protection of trade secrets and other confidential information, without violating the FTC’s rule.

*It's not effective yet, and substantial delays are expected from business groups who are likely to challenge it legally. It has to be published and then 120 days need to pass first.

*It does carve out pretty much one exception: for the sale of business-what that means is currently in flux, but it is likely going to be limited to owners

*If you have non-competes out there, you have an affirmative obligation to notify those people that they're no longer valid (click the blogpost below for standard approve language for this notice)

Key Points:

• The ban applies to new non-compete agreements for all workers, except senior executives with existing non-competes in place.

• Existing non-compete agreements for non-executive workers become unenforceable.

• The ban doesn’t cover non-competes outside the U.S. or in franchisor/franchisee relationships.

• Nonprofits and healthcare organizations may be exempt.

• Employers must notify affected workers about the unenforceability of existing agreements.

• The ban doesn’t affect non-disclosure or non-solicitation agreements, but overly broad ones may be considered non-compete clauses.

• There’s an exception for non-competes in bona fide business sales. The proposed rule stated the exception applied to owners of at least 25% of a business, but this part was removed from the final rule.

• State non-compete laws not in conflict with the FTC rule remain valid.

Challenges and Uncertainty:

• Legal challenges against the FTC rule are likely due to questions about its authority.

• A temporary restraining order or injunction may delay the rule’s implementation.

• Employers should monitor legal developments and consider adjusting their agreements accordingly.

Recommendation:

Employers should wait for legal challenges to unfold. If the rule stands, they have 120 days to comply. In the meantime, reviewing non-compete agreements and considering narrower alternatives like NDAs is advisable. We’ll keep you updated on any changes.

Extra credit:

Model language provided by the FTC at this website is here and (currently states):

A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:

·      You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].

·      You may run your own business—even if it competes with [EMPLOYER NAME].

·      You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].