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The Current Environment           

Non-compete agreements have become a fundamental part of the employment relationship, particularly for management level employees.  The Federal Trade Commission (FTC) estimates that 30 million people (almost 20 percent of U.S. workers) are bound by a non-compete agreement in their current jobs.  However, over the last several years, the enforceability of non-compete agreements has been under attack in several states.  California, North Dakota and Oklahoma (and Washington D.C.) have almost absolute prohibitions on non-compete agreements, and other states such as Colorado, Maryland, Oregon and Rhode Island allow them only under limited circumstances.[1]  The FTC has now stepped in, and on April 23, 2024, issued a rule banning almost all non-compete clauses in employer-employee agreements.[2]  The FTC has determined that it is an unfair method of competition (and therefore a violation of the FTC Act) for employees to enter into most non-compete agreements and for employers to enforce them, holding that: (a) “non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism;” and (b) the rule will lead to increased business formation and worker earnings, and lower healthcare costs.

The Response

The rule becomes effective 120 days following publication in the Federal Register (which is usually shortly following the FTC announcement).  However, legal challenges to the rule have already been issued, which could delay (or prevent) its implementation.  In fact, the day after its issuance, the U.S. Chamber of Commerce and the Business Roundtable, two powerful lobbying groups, along with other groups, filed a lawsuit against the FTC in an attempt to overturn the rule, claiming that the FTC has no authority to issue these types of rules.[3] 

The Rule

  • The rule makes it illegal for an employer to, except in limited circumstances as outlined below:
    • enter into or attempt to enter into a non-compete with a worker;
    • maintain a non-compete with a worker; or
    • represent to a worker, under certain circumstances, that the worker is subject to a non-compete.
  • The rule applies to employees, independent contractors and anyone else that works for an employer, whether paid or unpaid.
  • The rule supersedes all conflicting state laws.
  • Entities that are exempt from the FTC’s jurisdiction will be exempt from the rule (e.g. certain financial institutions and some non-profit entities).
  • The rule applies differently to “senior executives.”
    • A “senior executive” is any worker earning more than $151,164 (prorated for partial working years) who is in a “policy-making position.”
    • “Policy-making position” generally means a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.
    • “Policy-making authority” generally means final authority to make policy decisions that control significant aspects of a business entity, and does not include authority limited to advising or exerting influence over such policy decisions.
    • Existing non-competes with senior executives may remain in force.
    • Employers cannot enter into or attempt to enter into a non-compete with a senior executive after the effective date of the rule.
  • By the effective date of the rule, employers must provide each worker with an existing non-compete clause clear and conspicuous notice in writing that the non-compete clause will not, and cannot, be enforced against the worker.[4]
  • There is an exception to the rule for non-compete agreements entered into by a person in connection with: (a) a bona fide sale of a business entity; (b) of the person’s ownership in a business entity; or (c) all or substantially all of the operating assets of a business entity.[5] The FTC stated that non-competes under this exception will continue to be governed by state law, which generally permit such non-competes upon a showing that it is necessary to protect the value of the business being sold.
  • The rule also does not apply where a cause of action related to an existing non-compete agreement accrued prior to the effective date of the rule.
  • The FTC has stated that traditional non-disclosure agreements (NDAs) and non-solicitation agreements (of employees and/or customers) are unaffected by the rule as long as they do not have the “effect” of prohibiting workers from seeking or accepting other employment (and as long as they comply with other applicable laws). However, the FTC has not specified how to determine whether any such agreement has such an “effect”. 

What Employers Should Do

While it is unlikely the rule will become effective earlier than the fourth quarter of 2024 (and it could be much longer or may actually never become effective), employers should currently consider taking some or all of the below actions.

  • Assess Current Non-Competes. Take inventory of current non-compete agreements (and any other restrictive covenant agreements), including the language of the agreement, the title, authority and compensation of the worker who is bound by the agreement, and the term of the restrictive covenants.
  • Get Ready to Comply. As the effective date of the rule approaches:
    • prepare notices with the FTC model language for all applicable workers, since notice has to be given by the effective date;
    • consider formally amending existing agreements that have provisions in addition to non-compete clauses to remove the prohibited non-compete clauses; and
    • ensure that all form agreements that include non-compete clauses (e.g. employee covenants agreements that are signed as part of the onboarding process) are amended to remove any prohibited non-compete clauses.
  • Senior Executives. Since the rule does not apply to non-compete agreements entered into with senior executives prior to the effective date, consider entering into non-compete agreements with senior executives who do not have a current non-compete.  However, employers should consult with counsel to determine the applicability of any laws that may prohibit or limit their ability to enter into a non-compete agreement with an existing worker (e.g. some state laws may require that the existing worker is provided additional consideration in exchange for agreeing to the non-compete).
  • NDAs and Non-solicitation Agreements. Consult with counsel to review existing NDAs and non-solicitation agreements to assess whether such agreements may have the “effect” of prohibiting workers from seeking or accepting other employment.
  • Garden Leave Clauses. Consider having current and new employees agree to a garden leave clause.
    • Garden leave clauses are generally provisions where the worker remains employed (with full salary and benefits) but is not allowed to work or access any business information or systems during the garden leave period.
    • The typical garden leave period is six months.
    • The FTC has noted that an agreement where the worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis would not be a non-compete clause under the definition in the rule (even if the worker does not meet a condition to earn part of the expected compensation, such as a performance bonus).
    • However, as noted above, employers should consult with counsel to determine the applicability of any laws that may prohibit or limit their ability to enter into a garden leave clause with an existing worker.

The foregoing information is provided only for general reference. It does not constitute legal advice.  Legal advice may be provided based only on specific facts.  Please consult us before relying on any general information stated herein.  We are happy to discuss any questions you may have.

[1] On the flip side, last year New York’s governor recently vetoed a bill to completely ban non-compete agreements in New York.

[2] See

[3] Interestingly, two of the five voting FTC commissioners dissented, also questioning the FTC’s authority to enforce such a rule.

[4] FTC model language for such notice, which if used can be relied upon as a safe harbor, can be found at

[5] The final rule eliminated a proposed rule that limited this exception to owners, members or partners holding at least a 25% ownership interest in a business entity.

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