As we discussed in an October 2021 article regarding the future of restrictive covenant agreements in the U.S., President Biden in July 2021 directed the Federal Trade Commission (FTC) to explore potential ways to limit the use of non-compete agreements. In January 2023, the FTC followed through on the President’s directive by proposing a regulatory rule that would effectively ban such agreements.

And on Tuesday afternoon, more than 15 months after publishing the proposed rule and after receiving more than 26,000 public comments on the January 2023 proposal, the FTC at long last unveiled and approved its final non-compete rule (the final rule) in a party line 3-2 vote.

What does the final rule say?

The final rule provides as follows:

  • With respect to a worker – a broad term that encompasses employees, independent contractors, and interns – other than a senior executive, it is an unfair method of competition for a person (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause; or (iii) to represent that the worker is subject to a non-compete clause.
  • With respect to a senior executive, it is an unfair method of competition for a person (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause entered into after the effective date; or (iii) to represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.

In other words, once the final rule takes effect, virtually all preexisting and future U.S. non-compete agreements are and will be banned and unenforceable, with the exception of preexisting non-compete agreements with “senior executives” – which the final rules essentially defines as employees in policy-making positions earning more than approximately $151,164 annually – and the few other narrow exceptions noted below.

Notably, the final rule takes a broad view as to what constitutes a “non-compete clause,” defining the phrase as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The final rule clarifies that “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

Does the final rule apply to preexisting non-compete agreements?

As noted above, the final rule does indeed apply to preexisting employment agreements, except for preexisting non-compete agreements entered into with “senior executives.” With respect to all other preexisting non-compete agreements, those agreements will not and cannot legally, be enforced against the worker after the final rule’s effective date – which will be 120 days after it is published in the Federal Register – and employers must provide “clear and conspicuous notice to the worker,” by said effective date, of the same.

Said notice must (i) identify the person who entered into the non-compete clause with the worker and (ii) be on paper delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker. The final rule includes a model notice for employers to use.

That said, if an employer that is required to provide notice has no record of a street address, email address, or mobile telephone number for a particular worker that is subject to a preexisting non-compete, the employer is exempt from the notice requirement with respect to such worker.

Are there any exceptions to the final rule’s non-compete ban?

There are a few limited exceptions to the final rule, with the primary exception being that it does “not apply to a noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” (We will publish further guidance on this exception in the near term).

The only two other exceptions are for instances “where a cause of action related to a non-compete clause accrued prior to the effective date” and where a business enforces or attempts to enforce a non-compete agreement with a good-faith basis to believe that the final rule is inapplicable under the circumstances.

Final thoughts (for now)

It is important to note several clarifying matters. The first is that, under the final rule, the continued use of non-disclosure agreements, as well as customer and employee non-solicitation agreements, appears to generally be permissible – unless they are so broad as to fit within the final rule’s definition of “non-compete clause” and so long as they comply with applicable state law.

And second, there will absolutely be legal challenges to the final rule on multiple grounds, including that the FTC does not have the authority to regulate this issue – as previewed by the two dissenting Commissioners – and also that the FTC did not sufficiently tailor the rule to the purpose/justification underlying it. Despite these challenges, however, all U.S. businesses that have ever entered into non-compete agreements with their workers should immediately consult with legal counsel to determine a course forward in light of the final rule.

Lastly, given that we anticipate a multitude of questions about the final rule, here is a series of FAQs we prepared on the questions likely to be most immediately posed by the business community.