The Federal Trade Commission (FTC) issued a significant ruling on noncompete agreements in April 2024. This final rule has major implications for employers across the US, prompting a need to carefully review and adapt their approach to restrictive covenants.
According to the FTC, noncompete agreements inhibit fair competition and, therefore, violate Section 5 of the FTC Act. The new rule seeks to address this by broadly prohibiting employers from entering into noncompete agreements with any employee, except for senior executives, after the effective date on September 4, 2024, or 120 days after its publication in the Federal Register. This means employers can no longer restrict most workers from taking jobs with competitors after leaving the company.
For existing noncompete agreements, the rule offers some reprieve for senior executives. Under the final rule, existing noncompetes for senior executives can remain in force. Employers, however, are prohibited from entering into or enforcing new noncompetes with senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.
As for its impact on other restrictive covenants, FTC clarifies that the rule doesn’t automatically ban non-disclosure agreements (NDAs) or non-solicitation agreements. However, employers need to ensure these agreements are narrowly tailored. Any overly broad NDA or non-solicitation provision that effectively functions like a noncompete by hindering an employee’s ability to seek new opportunities will be considered unenforceable.
Going forward, employers should move toward a more selective approach to restrictive covenants. Carefully evaluate which employees might require an NDA or non-solicitation agreement. This particularly will be the case for those with access to sensitive information or client relationships.
The new rule emphasizes the importance of crafting clear and concise restrictive covenants. Employers should consult legal counsel to ensure their agreements are narrowly tailored and don’t violate the FTC’s definition of unfair competition.
In a release on its rule, the FTC estimated banning noncompetes would generate more than 8,500 new startups, spur job creation, and inspire innovations leading to an estimated increase of between 17,000 to 29,000 patents each year over the next decade. It will drive higher worker earnings and lower health care costs by up to $194 billion over the next decade.
Long-term uncertainty exists. The final rule is likely to face legal challenges, and could change depending on the outcome of November’s election. However, employers should proactively adapt their practices and consult with human resources or legal counsel to comply with the FTC’s new framework.
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Paul Lopez
Paul O. Lopez, a director for Tripp Scott, has served as the law firm’s chief operating officer since 2017, and has chaired the firm’s litigation department since 2010.