FTC Issues Final Rule Banning Use of Non-Compete Agreements

The Federal Trade Commission (FTC) has issued a Final Rule banning the use of non-
compete agreements in employment, independent contractor, and other relationships.

The rule will take effect 120 days after its publication in the Federal Register. Ufberg &
Associates published a Client Alert on the Proposed Rule in January of 2023.
The Final Rule defines a non-compete clause 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 term includes, but is not limited to, a contractual
term or workplace policy, written or oral. The definition does not appear broad enough to
prohibit the use of non-solicitation, non-disclosure, or other provisions as long as those
provisions are not so broadly drafted that they would have the effect of prohibiting
employment. There is some ambiguity in terms of how this definition will be applied.

The Final Rule states that it is an “unfair method of competition” for an employer:

1. To enter into or attempt to enter into a non-compete clause;
2. To enforce or attempt to enforce a non-compete clause; or
3. To represent that the worker is subject to a non-compete clause.

The restrictions have retroactive effect. If an employer is already a signatory to non-
compete clause with a worker, the Final Rule requires the employer to provide clear and

conspicuous notice to the worker that the worker’s non-compete clause will not be, and
cannot legally be, enforced against the worker by the effective date of the Final Rule. The
Final Rule also establishes requirements for the form of the notice, and provides model
language.

The Final Rule contains an exception for some Senior Executives who were already
covered by a non-compete clause as of the date of the Final Rule. A Senior Executive is
defined as a person with final authority to make policy decisions that control significant
aspects of a business entity or common enterprise, and a total annual compensation of
$151,164 in a year. It does not include executives who only have authority to advise or
influence policy decisions, nor does it include an individual with policy-making authority
over a subsidiary or affiliate of a business entity that is part of a common enterprise. The
exception only applies to senior executives who are subject to non-compete clauses on
the effective date of the Final Rule – after the effective date, even Senior Executives with
policy making authority cannot be asked to sign a non-compete clause.

There are also three general exceptions in the Rule:

1. A non-compete clause entered into by a person pursuant to the sale of a
   business;
2. A cause of action under a non-compete that accrued prior to the effective date
   of the Final Rule; or
3. Enforcement or attempted enforcement of a non-compete clause, or
   representations about a non-compete clause, where the employer has a good
   faith basis to believe that the Final Rule is inapplicable.

It should go without saying that legal challenges to the Final Rule are expected – the U.S.
Chamber of Commerce has already announced its intent to mount a legal challenge, and
other challenges are expected. There is some question about whether the FTC has the
authority to promulgate such a rule, as non-compete agreements have historically been
regulated by state law. We expect the legal battle over this issue to be lengthy.

Employers who utilize non-competes and other restrictive covenants should conduct a
self-assessment of how significantly their businesses may be affected by the Final Rule
by working with legal counsel to catalog the various versions of those agreements
currently in effect, and assembling a list of covered employees.

If you have any questions about how the FTC Final Rule will affect your organization,
please call our office. Thank you.

This Client Alert provides a general overview of new legal developments. It is not intended to
provide legal advice. If you have questions or would like more information about how these
developments may affect your business, please contact us at (570) 341-8800.