The Federal Trade Commission (FTC) made a pivotal move in labor regulation by issuing a final rule that bans post-employment noncompete agreements nationwide. This new regulation, which was set to take effect on September 4, 2024, but stayed by a federal district court in late August, aims to revolutionize the employment sector by enhancing job mobility, stimulating innovation, and fostering new business creation. The rule represents a significant shift in employment law and has far-reaching implications for workers and employers alike.
The FTC’s final rule marks a transformative change in how employment agreements are approached. The key elements of the rule include the following:
Broad prohibition
Employers are prohibited from entering into, enforcing, or attempting to enforce noncompete agreements with most workers, including employees, independent contractors, and even interns. This comprehensive ban extends to both written and oral agreements. Further, existing noncompete agreements with senior executives—defined as individuals earning over $151,164 annually and holding policy-making positions—can remain in effect. However, no new noncompetes can be introduced for any workers, including senior executives, after the effective date of the final rule. Under the rule, a noncompete is any term that restricts a worker from seeking or accepting new employment or starting a new business within the U.S. after leaving their current position. The rule also requires employers to notify affected workers (excluding senior executives) that their existing noncompete agreements will no longer be enforced. The FTC has provided model language to facilitate compliance.
Rule exemptions
Noncompete agreements related to the bona fide sale of a business are exempt from the ban. There is a provision for enforcing or making representations about noncompete agreements if there is a good faith belief that the rule does not apply. The rule does not preempt state laws unless they allow practices deemed unfair under the FTC’s new regulations. The rule also does not cover certain industries like nonprofits and specific financial institutions.
The FTC expects that the rule will bring about substantial changes across the U.S. economy:
Assistance with business formation
The FTC projects a 2.7 percent annual increase in new business formation, translating to over 8,500 additional new businesses created each year. This anticipated growth could enhance market dynamism and competition and create an opportunity for lawyers to assist in the formation of new entities.
Higher earnings for existing workers
The FTC expects that workers will see an average annual earnings increase of $524 as a result of improved job mobility and reduced constraints from noncompete agreements. An increase in overall marketplace job satisfaction could see a downturn in employment-related claims as a result.
Rule projects lower healthcare costs
The FTC claims the rule could lower healthcare costs by up to $194 billion over the next decade, attributed to better job matches and reduced legal disputes over noncompete agreements.
FTC sees rule change as motivator for incubators and start ups
The FTC forecasts an increase in patent filings by 17,000 to 29,000 annually over the next decade, driven by the enhanced freedom for workers to switch industries and roles. This upturn in patent and IP related matters will increase the need for lawyers in these areas, according to the FTC.
Other benefits from the final rule
According to the FTC, the final version of the rule simplifies compliance by removing the need for formal rescindment of noncompetes and instead requiring notification to affected workers. The FTC expects this change to streamline the transition for businesses.
The FTC’s decision has garnered mixed reactions from various stakeholders, with the public and industry insiders remaining opposed to one another. During the rulemaking process, the FTC received widespread public support for the proposed rule, with over 25,000 comments backing the ban.
ABA leaders suggest that this is the trend in the legal landscape. “More and more states have been prohibiting, or strictly limiting, noncompetes as a matter of state law,” observes , Philadelphia, PA, Litigation Section Book Board Member. “California has been a noted leader in this regard, and California businesses do not appear to have suffered,” he adds. “Post-employment noncompetes have become harder to enforce,” adds , Seattle, WA, Co-Chair of the Section’s Committee.
Krauss points to the availability of other avenues for employers to effectively protect their interests, including “confidentiality and trade secret protections, as well as ‘golden handcuffs.’ I would suggest that employers follow the lead of their California compatriots, especially because, even absent the FTC rule, the pendulum is definitely swinging against noncompetes,” declares Krauss. “I would suggest that employees follow the words of wisdom given by a judge with whom I served on a panel; if you leave and take nothing with you, the judge will usually find a way not to enforce the noncompete. But if you take something that looks like a trade secret, it becomes a very different case,” opines Krauss.
Esler suggests that this issue is likely to end up at the Supreme Court for ultimate decision. While agreeing with Esler, Angela Foster, New Brunswick, NJ, Co-Chair of the Section’s Trial Practice & Evidence , suggests that “[t]he FTC concluded that noncompetes unlawfully stifle competition and depress wages for U.S. workers. Therefore, banning noncompete clauses would encourage competition, innovation, and increased wages.”
While the new rule was approved by a 3–2 vote, the dissenting commissioners’ concerns reflect ongoing debates about the rule’s impact on specific sectors and potential legal challenges. Section leader Allegra Lawrence-Hardy, Atlanta, GA, Co-Chair of the Minority Trial Lawyer Committee detailed two then-pending cases at the time of the interview: “The two primary cases challenging the FTC rule on the grounds that the FTC exceeded its authority or that there is a less intrusive means than banning noncompete agreements, are pending in the Northern District of Texas and Eastern District of Pennsylvania.”
In the Texas case, Judge Ada E. Brown “recently ruled oral argument was not required and that she would decide the injunctive relief request on the papers, including briefs from multiple intervenors and amici,” summarizes Lawrence-Hardy. And as Lawrence-Hardy correctly predicted that a court would do, Judge Brown permanently blocked the FTC’s action, holding that the rulemaking exceeded the FTC’s statutory authority. In her August 20, 2024 opinion, Judge Brown effectively prevented the FTC’s rule from taking effect on September 4, 2024.
In the Pennsylvania case, on the other hand, the plaintiff withdrew the challenge to the rule after the district court denied a motion to stay proceedings.
The FTC’s final rule underscores several effective alternatives to noncompete agreements for protecting business interests:
Forgo new noncompetes
Section leaders suggest employers can dispense with new noncompete agreements. “Employers need to prepare to comply with the FTC rule if it does go into effect []—that includes a careful review of any existing noncompete agreements to prepare notices or evaluate the application of an exception,” suggests Rebecca Sha, New Orleans, LA, Co-Chair of the Section’s Minority Trial Lawyer Committee. “Unless there’s a clear exception (i.e. sale of a bona fide business), I would not recommend employers to require employees to enter into new noncompete agreements,” advises Sha. “There’s definitely a lot of uncertainty in the air,” she notes, predicting the court decisions that have since enjoined the rule, “but until there’s a definite decision enjoining the rule from going into effect, employers need to take appropriate steps to ensure compliance,” Sha adds.
Section leaders also advise to double check the jurisdiction. “Many of the noncompete cases we handle in the Delaware Court of Chancery involve the sale of the business,” notes Elizabeth S. Fenton, Wilmington, DE, Co-Chair of the Section’s Mental Health & Wellness Committee. “Noncompetes entered into as part of the bona fide sale of a business are carved out from the final rule,” she explains.
Use of Nondisclosure Agreements (NDAs)
NDAs are commonly used and provide a practical means to protect sensitive information. According to the FTC, most workers with noncompetes already have an NDA. “Employers that want to be more proactive can consider tightening up NDAs and nonsolicitation provisions and investing less in the creation and enforcement of noncompetes, and more in competitive salaries and benefits and attractive working arrangements commensurate with (or even above that offered by) the company’s competitors,” adds Lawrence-Hardy. “Regardless of the approach taken, however, all employers should resolve to pay close attention to rulings from the pending legal challenges,” she says. “As to employees, they should be aware that if they choose to ignore an existing noncompete agreement, their employer can still enforce the agreements, particularly if the effective date of the rule is delayed,” advises Lawrence-Hardy.
“Properly structured employment agreements, including agreements containing nondisclosure, nonsolicitation, and inevitable-disclosure provisions, could strike a balance between complying with the FTC’s noncompete ban and protecting proprietary information, since the ban does not prohibit nondisclosure or nonsolicitation agreements or displace trade-secret protections,” adds Brian A. Hill, Washington, DC, Co-Chair of the Section’s Business Torts & Unfair Competition Committee. Hill suggests that the newly adopted agreements “are likely to be tested in litigation, and courts are likely to have competing views about the extent to which the agreements are enforceable.” “Carefully drafted, properly tailored restrictions on workers’ future use of proprietary information, as well as agreements making it easier for employers to invoke the inevitable-disclosure doctrine, could offer some certainty in an uncertain legal environment,” suggests Hill.
Review compensation structure
Section leaders argue the new rule should force companies to review their existing agreements with employees. “Employers need to take stock of their existing restrictive covenant agreements, not limited to those that use a term like ‘noncompete,’” recommends Elizabeth T. Timkovich, Huntersville, NC, Co-Director of Committee Development for the Section. “Agreements or terms and conditions tied, for example, to incentive compensation plans may include restrictions against nonsolicitation of certain customers and/or employees,” she notes. “While the new FTC rule does not appear to prohibit limited nonsolicitation provisions, some nonsolicitation provisions could be read as effectively restricting a former employee from engaging in any competitive business, which may bring the new FTC rule into play (assuming it goes into effect, which is debatable),” says Timkovich. “If an employer’s existing restrictive covenant agreements could be read as effectively prohibiting or restricting competition by someone other than a policy-making-level executive (and other exceptions in the rule do not apply), the employer needs to be ready to notify affected employees of the lifting of the relevant restriction,” she concludes.
The FTC’s final rule banning noncompete agreements signifies a major shift in employment law, aimed at promoting a more dynamic and innovative economy. According to the FTC, by enhancing worker mobility, encouraging new business creation, and fostering higher earnings, the rule addresses critical concerns about the restrictive nature of noncompete agreements. If the rule ultimately takes effect, stakeholders will need to adapt to these new regulations and navigate the evolving landscape of employment practices.
