By Ron Lefebvre, Esq.

April 24, 2024

The Federal Trade Commission (“FTC”) adopted a final rule on April 23, 2024 (the “Rule”), providing that “it is an unfair method of competition” for employers to enter into non-compete clauses with their workers and effectively banning such clauses as illegal under the Federal Trade Commission Act. The Rule will go into effect 120 days after its initial publication (“Effective Date”).

The Rule provides for a “comprehensive ban on non-competes with all workers.” Existing non-competes (except as noted below) become unenforceable on the Effective Date, and employers must provide notice to any workers with existing non-competes, indicating that the non-competes are no longer enforceable. Employers may not enter any new non-competes with their workers on or after the Effective Date.

Can the FTC do this?

Many commentators think that the FTC does not have the power to make substantive law which supersedes the laws of 50 states. The US Chamber of Commerce has already commenced suit against the FTC, challenging the legal authority of the FTC to enact the Rule and seeking to block its implementation. Other suits will follow. It is possible that the federal courts will stay the application of the Rule while this litigation is pending. It is also possible that legal challenges result in substantive changes to the Rule.  However, as it currently stands, the Rule applies.

Are there exceptions?

With respect to existing non-competes, “senior executives” will be exempted from the Rule—i.e., non-competes which employers entered into before the Effective Date with senior executives can be enforced (subject to existing state law). A “senior executive” is defined as an individual who has “final authority to make policy decisions that control significant aspects of a business entity,” and received a total annual compensation package of over $151,164. This exception does not apply to new non-competes, entered into after the Effective Date.

Additionally, the Rule expressly does not apply in the context of the bona fide sale of a business entity, of a person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.

The Rule further does not apply to a claim for breach of a non-compete agreement which accrued prior to the Effective Date. Finally, the Rule does not prohibit an attempt to enforce a non-compete clause where there is a “good-faith basis” to believe that the Rule does not apply to such enforcement action.

What about non-solicitation clauses?

The Rule defines a “non-compete clause” to include a “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker” from “seeking or accepting work” or “operating a business” after the termination of their employment. Whether a “non-solicitation” provision will be deemed a “non-compete clause” will involve a “fact-specific” inquiry—i.e., does the clause “function to prevent” the worker from seeking or accepting other work or starting a business.

Please contact our firm if you would like assistance in understanding the Rule’s effect on your business and existing employment agreements.

YMFZ is an efficient, skilled, closely-held Pittsburgh law firm which for more than 30 years has been offering good counsel, personal attention, and cost-effective representation to its clients for all manner of business legal needs, including commercial litigation, business set-up and finance, commercial and technology contracting (including bank representation), employment law, real estate (including oil and gas), and intellectual property. YMFZ clients include both large national and multi-national corporations and regional and local businesses. For more information on our firm, please visit www.ymfzlaw.com.