The FTC Bans Non-Compete Agreements: The Key Points to Know

By April 29, 2024 April 30th, 2024 Labor and Employment

BY

On April 23, 2024, the Federal Trade Commission (FTC) issued its final Non-Compete Rule prohibiting the enforcement of non‑compete agreements for most workers in the United States.  In its Supplementary Information to the FTC Non-Compete Rule, the FTC “estimates that approximately one in five American workers—or approximately 30 million workers — is subject to a non-compete.”

This Rule therefore marks a significant change that will affect how employers compete for talent and retain employees.  Below are some key points that Employers should be aware of going forward:

Effective Date: The FTC Non-Complete Rule takes effect 120 days after it is published in the Federal Register, which would presumably be late-August 2024.  Litigation challenging the FTC Non-Compete Rule has already been filed, and it is possible, if not likely, that the effect of the Rule will be stayed.  Until such time, the 120-day period is the anticipated effective date.

Scope of the Rule: Subject to a few narrow exceptions, the FTC Non-Compete Rule prohibits employers from enforcing any existing written or oral agreements, term, or policy that prohibits, penalizes, or prevents a worker from (a) seeking or accepting work in the United States with a different person; or (b) operating a business in the United States after the conclusion of the employment.  The FTC Non-Compete Rule further prohibits employers from entering into a non-compete agreement or representing to a worker that they are subject to a non-compete clause.  The term “worker” is defined broadly in the Rule to also include independent contractors.

Exceptions:

  • The Senior Executive Exception: There is a narrow exception to the FTC Non‑Compete Rule for senior executives with existing non‑compete agreements.  The FTC defines “senior executives” as employees who (a) earned at least $151,164 annually; and (b) held a policy‑making position, such as president, chief executive officer, or any other employee with “policy‑making authority for the business entity similar to an officer with policy-making authority.”  Under this exception, employers may enforce non‑compete agreements entered into with senior executives, so long as the non-compete agreement was in existence before the FTC Non-Compete Rule’s effective date.  Even under this exception, however, employers are still prohibited from entering into any non‑compete agreement after the effective date, regardless of whether the employee qualifies as a senior executive.
  • Bona Fide Sale of Business Exception: The FTC Non-Compete Rule does not apply to a non‑compete clause that is entered into by a person as part of a bona fide sale of a business entity, ownership interest in a business entity, or all or substantially all of a business entity’s operating assets.
  • Existing Cause of Action Exception: The FTC Non-Compete Rule does not apply where a cause of action related to a non-compete clause accrued prior to the effective date.
  • Good Faith Exception: The FTC Non-Compete Rule does not apply to an employer who enforces or attempts to enforce a non-compete clause or who makes representations about a non-compete clause, so long as the employer has a good‑faith basis to believe that the FTC Non‑Compete Rule does not apply.

Notice Requirement: The FTC Non‑Compete Rule places an affirmative duty on employers to provide “clear and conspicuous notice to the worker by the effective date that the worker’s non‑compete clause will not be, and cannot legally be, enforced against the worker.”  The Rule also places specific “form of notice” requirements on the employer.  Employers should therefore begin considering whether they will be required to notice any of its former or current employees.

The FTC Non-Compete Rule vs. Maine Law: Although the FTC Non-Compete Rule does not limit or affect enforcement of State law, the Rule does preempt State law where conflicts arise.  Maine permits employment non-compete agreements under certain circumstances.  See 26 M.R.S. § 599‑A.  Nevertheless, the FTC Non‑Compete Rule will, in most cases, preempt Maine law, making most Maine employees’ non-compete agreements unenforceable.

As noted above, however, there is a narrow exception for non‑compete agreements entered into with senior executives before the Rule’s effective date.  For these agreements, employers will still need to comply with Maine law.  For a non-compete agreements to be enforceable under Maine law, the employer must, among other things, (a) notify an employee or prospective employee of a non-compete agreement, and (b) provide the employee a copy of the non-compete agreement at least three business days before the employer requires the agreement to be signed.  Further, under section 599-A, most non‑compete agreements do not take effect until after one year of employment or six months from the date the agreement was signed, whichever is later.  Maine’s non‑compete agreement statute, however, does not apply to non‑compete agreements entered into before September 19, 2019.  For the even fewer non‑compete agreements that (a) fit within the senior executive exception, and (b) were entered into before September 19, 2019, Maine’s common law principles would apply.  See, e.g., Chapman & Drake v. Harrington, 545 A.2d 645 (Me. 1998).

If you are wondering if your non-compete agreement is enforceable under the FTC Non‑Compete Rule or Maine law, contact one of our attorneys in the Employment Law, Business and Corporate Law, or Intellectual Property & Technology Practice Groups at Perkins Thompson.  For a more in-depth understanding of how the FTC Non-Complete Rule may impact tech companies, see The New Federal Rule Banning Noncompetition Agreements: What Tech Companies Should Know by Adam Nyhan, Esq., and William J. Sheils, Esq.

Camrin Rivera represents employers and employees in labor and employment law matters.  He is an attorney in the Employment Law, Litigation, and Business & Corporate Law practice.