KMK Law Management Rights Blog

Yesterday, the Federal Trade Commission (“FTC”) announced its long-anticipated final rule finding that the vast majority of non-compete agreements constitute unfair methods of competition, and are thus invalid. An estimated 30 million employees are covered by non-compete agreements, representing nearly one in five U.S. workers. Thus, this announced rule has the potential to significantly impact the labor market, as well as cause a shift in employers’ business strategies.

The final rule will be published in the Federal Register in the upcoming days, and then go into effect 120 days after publication. The full text of the rule can be found here but there are highlights from the rule employers should be particularly aware of:

1. In addition to prohibiting employers from entering into new non-compete agreements with their employees, the final rule invalidates existing non-compete agreements employers already have in effect. An exception is provided for “senior executive” employees, which the rule defines as employees earning more than $151,164 annually who are in a “policy-making” position. Employers are prohibited from entering into new non-compete agreements with senior executive employees, but existing non-compete agreements remain enforceable. 
2. While the final rule invalidates most existing non-compete agreements, it does not apply if a cause of action related to a non-compete agreement accrues prior to the effective date of the rule. Thus, the rule does not excuse past violations of non-compete agreements, nor impact pending claims related to the breach of non-compete agreements.
3. The final rule requires employers to provide notice to workers bound by non-compete agreements that the agreements will not be enforced against them in the future. The rule provides model language for employers to provide.
4. While the final rule applies to most non-compete agreements, it does not apply to agreements entered into as a part of a bona fide sale of a business entity. Non-compete agreements entered into in connection with such a sale remain enforceable. 
5. The final rule considers other restrictive covenants, such as non-disclosure agreements and non-solicitation agreements, as distinct from non-compete agreements because they do not by their terms prevent a worker from seeking or accepting other work or starting a business. Accordingly, these agreements may still be valid. However, if a non-solicitation agreement functions with the effect of preventing an employee from seeking or accepting other work, it may nevertheless fall under the final rule’s definition of a non-compete agreement and therefore be invalid. Whether a non-solicitation agreement meets this threshold is a fact-specific inquiry. 

While all employers should be aware of the final rule and be ready for its implementation, the final rule is subject to potential legal challenge. Business groups critical of the FTC’s proposed rule indicated they would challenge any final rule invalidating non-compete agreements, and therefore legal action challenging the final rule’s implementation is likely. Given this uncertainty, employers should be sure to consult with counsel regarding the present-status of non-compete law as issues arise. Please reach out to a member of the Labor and Employment Practice Group with any questions regarding how this final rule may impact your business.