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What Businesses Need To Know About the FTC’s New Noncompete Rule

On April 23, 2024, the Federal Trade Commission (FTC) finalized its Non-Compete Clause Rule. If the rule takes effect, it will require businesses to:

  • Halt enforcement of existing noncompete agreements, or clauses of agreements

  • Refrain from entering into new noncompete agreements (with a few exceptions)

What are noncompetes, and do you have them?

Noncompete clauses are a common fixture of employer-employee agreements. They’re most often found in offer letters or other similar documents. If you’ve been using a template agreement with your workers, you may have noncompete clauses that you’re unaware of.

A noncompete clause limits an employee’s ability to seek or accept employment with a competitor or leave their employer and start a competing business. By law, these clauses must define a geographic scope and temporal limit (time period) for the employee’s competitive activities.

When does the Non-Compete Clause Rule take effect?

The final rule is set to take effect 120 days after its publication in the Federal Register, which has not yet happened. 

However, the rule is facing immediate legal challenges. These challenges question the rule’s legitimacy and the FTC’s authority to pass it. The rule may not survive these legal challenges. In any event, litigation may push back the rule’s effective date significantly.

Are there any exceptions to the rule?

The FTC has outlined three narrow exceptions to the rule:

  1. An exception for senior executives: Senior executives who are in “policy-making positions” and make $151,164 per year or more are excepted from the final rule if their noncompete agreements existed before the rule was finalized. New noncompete agreements with senior executives will be invalid under the rule.

  2. An exception for the sale of a business: The final rule does not prohibit noncompete clauses involved in the sale of a business, all of a business’s assets, or the sale of an ownership interest in a business.

  3. An exception for current employees: The final rule only prohibits employers from banning competitive activities after the employee’s tenure with the employer has ended. Employers are free to prohibit employees from engaging in competitive activities during their tenure.

How should you communicate with your employees about the rule?

You will be required to notify employees of the nullification of their noncompete clauses within 180 days of the final rule’s effective date. The FTC has provided model language for this purpose. You will not have to formally rescind your existing noncompetes (e.g., amend existing employment agreements).

How can you protect your interests in light of the Non-Compete Clause Rule?

You can strengthen the nondisclosure and nonsolicitation clauses of your employment agreements to protect your confidential information and trade secrets. You can also clearly define what categories of information constitute confidential information and trade secrets.

Seventeen states currently allow employment injunctions in the absence of a noncompete between an employer and an employee. An injunction may be awarded if an employee leaves your company for a competing business, has access to trade secrets, and will inevitably rely on that trade secret information in their new role.

Make sure you comply with the Non-Compete Clause Rule and other requirements

No matter the size of your business or the number of workers you employ, barring a successful legal challenge, you should be prepared for the final rule to go into effect. You should review your existing employment agreements for explicit and de facto noncompete agreements. Create a plan for revising the language if the final rule takes effect.


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