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Strategies and Legal Challenges Following FTC's Noncompete Rule
In April 2024, the Federal Trade Commission voted to adopt a new rule that limits noncompete clauses/agreements (the rule). The rule is slated to go into effect on Sept. 4, 2024. This article summarizes the rule, some pending challenges to the rule, and strategies that businesses should consider implementing today to protect their interests.
|What Does the Rule Cover?
Beginning on Sept. 4, the rule will generally prohibit employers from entering new noncompete clauses with workers. The rule treats existing noncompete agreements differently depending on whether the worker is a "senior executive," which includes workers who: 1) earn more than $151,164 and 2) are in a "policy-making" position. For these, existing noncompete clauses remain valid and enforceable. For all other workers, existing noncompete clauses will no longer be enforceable. Additionally, employers must inform such other workers that any existing noncompete clauses are no longer enforceable.
The rule contains several exceptions. For example, the rule does not apply to noncompete agreements related to a bona fide sale of a business entity. The rule also does not apply where a cause of action related to the noncompete accrued prior to Sept. 4, 2024. It also does not apply to entities outside the FTC's jurisdiction, including certain banks, nonprofits, and state and local government agencies. The rule also provides a "good faith" exception, which provides that it is not unfair competition for a company to enforce or attempt to enforce a noncompete clause if it believes in good faith that the rule is inapplicable. Notably, however, the rule does not contain an exception for workers with access to trade secrets, which has been adopted by some jurisdictions that had previously banned noncompete clauses. The FTC determined that such an exception was unnecessary in view of other less-restrictive alternatives that companies can implement.
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