In January 2023, the Federal Trade Commission (FTC) proposed a new rule that would effectively ban employers from using noncompete agreements. Due to overwhelming public feedback—both in support of and against the proposed rule—the FTC decided to wait until April 2024 to vote on the final version of the proposed rule. (For information on the original proposal and its implications on Missouri, Illinois, and Indiana law, please see our previous blog post from June 2023.)
The FTC has now issued the final version of that rule following a 3-2 vote. The final rule provides that noncompete agreements are an “unfair method of competition” in violation of Section 5 of the FTC Act, 15 U.S.C. § 45. According to the FTC, the final rule will likely lead to several benefits, such as more than 8,500 new businesses created each year, increased earnings of $524 per year for the average worker, up to 29,000 more patents each year, and reduced healthcare costs.
The final rule becomes effective 120 days after publication in the Federal Register, meaning that employers should have until Fall 2024 to familiarize themselves with the new rule and its potential implications. However, this timeline may be affected by lawsuits (see, e.g., Chamber of Commerce v. FTC) that seek to prevent or limit the rule’s implementation. The upcoming presidential election may also play a role in the rule’s long-term prospects.
In the meantime, the FTC has included model language in the final rule that employers can use to acquaint themselves with the rule and communicate it to workers. Unlike the proposed rule, employers will not be required to formally rescind any existing noncompete agreements, but they will have to provide notice to their workers that such agreements will not be enforced against them in the future.
Employers will also need to determine whether certain exceptions apply to them. For example, existing noncompete agreements with “senior executives”—workers in policy-making positions who make more than $151,164.00 annually—will remain enforceable, though any new agreements will be prohibited. Organizations outside the FTC’s jurisdiction, such as banks and certain nonprofits, will also be exempt from the rule. Businesses may also want to consider alternatives to noncompete agreements, including trade secret laws and non-disclosure agreements.
For assistance in navigating the potential impact of the new rule on your business, please contact our Employment and Labor Law practice group.
