On April 23, 2024, the Federal Trade Commission (FTC) announced a final rule making most non-compete clauses unenforceable. Employers who require their employees to sign agreements with confidentiality, non-compete, and non-solicitation clauses should take note of the new rule and its potential implications for their organizations going forward.

What does the FTC’s non-compete rule say?

The FTC’s non-compete rule generally makes it an unfair method of competition to:

• enter into or attempt to enter into a non-compete clause;
• enforce or attempt to enforce a non-compete clause; or
• represent that a worker is subject to a non-compete clause.

In essence, this rule essentially bans the use of non-compete clauses in employment, in all but very narrow circumstances.

What is considered a “non-compete clause” under the FTC’s non-compete rule?

A “non-compete clause” is defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

Given the definition, the rule reaches beyond traditional non-compete clauses that prohibit an employee from becoming employed with a competitor after the end of employment. Specifically, the “non-compete clause” term includes provisions that “penalize a worker” for seeking or accepting reemployment or “functions to prevent a worker” from seeking or accepting reemployment. This language pulls in forfeiture clauses—that is, clauses that provide for a forfeiture of benefits or payment of liquidated damages if the employee competes. In addition, the “non-compete” definition may arguably cover broadly worded confidentiality and customer non-solicitation clauses, if they have the effect of preventing a worker from obtaining reemployment.

Importantly, however, the “non-compete clause” definition does not include prohibitions against competing against a current employer. In addition to enforcing fiduciary duties of loyalty an employee owes an employer, the FTC rule does not prohibit an employer from enforcing a contractual obligation not to compete while the employee is employed by the employer.

That said, the FTC’s rule is not limited to “non-compete clauses” entered into by employees. Rather, it expands to all “workers,” which also include independent contractors, externs, interns, volunteers, apprentices, and sole proprietors. (The term does not include a franchisee in the context of a franchisor–franchisee relationship.)

Can I still enforce non-compete clauses entered into before the FTC’s rule?

As a general matter, the FTC’s non-compete rule prohibits an employer from enforcing or attempting to enforce a non-compete clause. Unless an exception applies, this prohibition makes it unlawful to hold an employee to a non-compete clause, regardless of when the clause was agreed to.

However, there is an exception for “senior executives” who were already bound by non-compete clauses before the effective date of the rule. The FTC’s non-compete rule does not preclude an employer from enforcing a non-compete clause against those senior executives.

To qualify as a “senior executive,” a worker (1) must meet a certain compensation threshold (generally, $151,164 annualized in the preceding year, or the year preceding the worker’s departure if the worker departed prior to the preceding year); and (2) must have been in a “policy-making position.”

Do I have to inform my employees that their non-competes aren’t enforceable?

Yes. The FTC’s non-compete rule requires employers, by the effective date of the rule, to provide their workers with a “clear and conspicuous” notice that their non-compete clauses “will not be, and cannot legally be, enforced.” The rule also provides model language for the notice, which operates as a safe harbor for a compliant notice.

Are there any exceptions to the rule’s prohibition on non-compete clauses?

Yes. The rule carves out non-compete clauses that are entered into by a person “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” This exception appears to permit non-compete clauses to be entered into as a part of a corporate acquisition transaction.

The rule also carves out causes of action for breach of a non-compete clause that accrued before the effective date of the rule.

When does this rule go into effect?

The rule is to go into effect 120 days after the rule is published in the Federal Register.

What should employers do now?

Although the rule is set to become effective 120 days after publication in the Federal Register, the rule’s legality is expected to be challenged in court. Indeed, the U.S. Chamber of Commerce has said that it will sue the FTC to block the rule. Employers should monitor the status of the rule as challenges to it progress through the courts.

In addition, employers should take this opportunity to consider what efforts they should take—other than entering into non-compete clauses—to protect their interests in their trade secrets and confidential and proprietary information. This may include:

• controlling access to sensitive information, such as through physical or electronic security measures;
• prohibiting or tightly controlling employees’ access to, or ability to download, confidential information using personal laptops and cell phones;
• developing policies and procedures, and remote-work agreements, to address employees’ use of company computers and cell phones when working remotely;
• password-protect and limit electronic access to confidential and sensitive information that is stored on company servers and cloud services;
• clearly communicate policies and procedures regarding the company’s confidential information;
• train employees on how to handle and prevent misuse or disclosure of confidential information; and
• adopt procedures to ensure that departing employees do not misappropriate trade secrets or take confidential information with them.

Employers would be well advised to consult with their employment attorneys to discuss these and other preventive measures.