FTC Bans Employee Noncompete Agreements

On April 23 the Federal Trade Commission (FTC) announced a comprehensive ban on noncompete agreements for all U.S. workers. If permitted to go into effect, the rule will have a profound impact on how U.S. businesses hire, train and pay workers and protect sensitive business information.

While the rule permits the enforcement of existing noncompete agreements for senior executives (defined as those who earn more than $151,164 annually and who are in a “policy making position”), existing noncompete agreements for all other workers will immediately become unenforceable. The rule does not apply retroactively, meaning that litigation involving a noncompete agreement that is pending when the rule takes effect may continue. There is an exception permitting noncompete agreements in connection with the sale of a business if certain requirements are met.

The rule purports to apply beyond traditional noncompete agreements: The FTC proposes to apply a three-pronged definition to determine whether an agreement functions as a noncompete, even if it is not labeled as such. Thus, while the rule does not categorically prohibit non-disclosure agreements (NDAs), non-solicitation agreements and other restrictive covenants, if an agreement is so “broad or onerous that it has the same functional effect” as a noncompete agreement, it will be unlawful under the FTC’s rule.  

The final rule will be effective 120 days after the rule’s publication in the Federal Register. However, it is almost certain to face legal challenges, which may delay the effective date.

For questions about what you can do to prepare for the new rule, or if you are interested in being connected with business and industry groups that intend to challenge the rule, please contact Brad M. Kushner at brad.kushner@stevenslee.com.