Authored by Laura Friedel, Peter Donati, and Jason Hirsh

Yesterday, April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to implement a new rule banning non-compete agreements for most U.S. workers. Specifically, the new rule prohibits employers from entering into or enforcing (or attempting to enter into or enforce) provisions that restrict workers from going to work for another employer or starting a business. Not only are employers prohibited from entering into non-compete agreements, but employers with active non-compete agreements must notify employees that the restrictions are void. However, the rule does not apply to agreements entered into as part of a bona fide sale of a business, and non-competes with certain “senior executives” that are in place as of the effective date of the rule (likely late August 2024) can remain in effect.

Business groups have already filed suit to block the rule on the grounds that the FTC exceeded its authority. If not blocked by the courts, the rule goes into effect 120 days from the date of publication in the federal register. Employers need to be aware of – and prepare for –if the rule becomes effective. Here are the key takeaways for businesses:

• The rule prohibits non-compete agreements by classifying them as an “unfair method of competition.” It goes on to define a non-compete agreement as a requirement that prohibits or penalizes a worker for seeking or accepting work with a different person or operating a business, in each case, after their employment ends.

• There are a couple of key exceptions to the general prohibition on non-competes:
  • The rule does not apply to non-competes entered into as part of a bona fide sale of a business, of a person’s ownership interest in a business, or of all or substantially all of a business’s assets.
  • Also, the rule does not apply to non-competes with “senior executives” that are in place before the rule’s effective date. “Senior executives” are defined as those who are making more than $151,164 annually and are in a “policy-making position.” “Policy-making position” is defined narrowly to include the CEO, COO and other officers and workers who have “final authority to make policy decisions that control significant aspects of a business.” The rule goes on to clarify that it is not enough if the worker advises or exerts influence over policy decisions and that it is not enough to have decision-making authority for only a subsidiary or affiliate of a common enterprise.
• It is noteworthy that the rule does not prohibit non-solicitation agreements (i.e. prohibitions on soliciting clients or customers). However, the FTC left open the possibility that certain types of customer restrictions may be the functional equivalent of a non-compete – such as sweeping non-acceptance provisions (in which workers agree not just that they won’t solicit customers, but also that they won’t do business with them).
• The rule applies to all workers, which includes not just employees but also independent contractors, consultants and others.
• The rule does not specifically speak to workers who are also members, shareholders or partners in the business. As noted above, the rule allows restrictions that are tied to an individual’s sale of their interest in the business. However, the FTC’s comments suggest that the rule will apply to owners of a business to the extent they provide services to the business and are therefore “workers.” It remains to be seen where the line between seller of an interest and worker falls.
• The rule requires that employers provide notice to any employees who are currently covered by non-compete provisions that are unlawful under the rule that those provisions are no longer enforceable. The rule includes a draft notice to be provided.
• State law provisions that are more restrictive (such as California) remain in place. Essentially, the FTC rule sets a new floor. States can still take action to limit restrictive covenants above and beyond that floor.
• Finally, note that the rule applies to both existing restrictions and new ones. So it is important to consider not just new agreements but also those you already have in place.

Unless a court puts the rule on hold, employers should be taking the following steps in the next 30-60 days:

• Think about how you might use the exception for senior executives with existing covenants to your advantage. If you have agreements in place with individuals who you think may qualify as “senior executives,” confirm that they meet that definition and, if appropriate, make changes to their role or compensation so they do. If you have individuals who would qualify as senior executives and don’t currently have non-competes, consider whether to take advantage of this 120-day window to implement them.
• Review existing agreements with an eye toward:
  • Confirming that confidentiality, non-disclosure and trade secret provisions are as strong as you need to protect your business.
  • Implementing non-solicitation provisions if they aren’t already in place.
  • Revising non-acceptance of business provisions to carve out situations where accepting business would be a prohibition on going to work with a new employer (for instance, going to work for a client or customer, or going to work for a company that also works with your client or customer)
• If you have agreements in place that include non-compete provisions that violate the rule, either amend those agreements to remove those provisions or prepare to issue the required notices.
• KEEP WATCHING OUR WEEKLY LP3 EMAILS. AS NOTED ABOVE, LITIGATION HAS ALREADY BEEN FILED TO BLOCK THE RULE. WE WILL KEEP YOU APPRISED OF DEVELOPMENTS.

If you have questions about the new rule, do not hesitate to reach out to LP’s Employment & Executive Compensation Group.