On April 23, 2024, the FTC announced a Final Rule banning the use of non-compete agreements with workers nationwide, determining that such agreements constitute an unfair method of competition by negatively affecting competitive conditions in labor markets. 

The FTC Rule will take effect 120 days after its publication in the Federal Register. As of the date of this article, the Rule has yet to be published - only announced. This article will be updated with the effective date of the Rule once publication has occurred.

What is a Non-compete Agreement?

Traditional non-competes are those agreements and clauses that prevent workers from going to work for a competitor. The FTC Rule, however, adopts a much broader definition for what constitutes a non-compete agreement.

Under the FTC Rule, a “non-compete clause” is a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (a) seeking or accepting work in the U.S. with a different business where such work would begin after the conclusion of employment or (b) operating a business in the U.S. after the conclusion of employment and includes, as a “term or condition of employment,” a contractual term or workplace policy, whether written or oral.

This definition of a “non-compete clause” could include other types of commonly used restrictive covenants, such as overly broad confidentiality and nondisclosure agreements, overly broad co-worker and customer non-solicitation agreements, and training repayment agreements. If they functionally “prohibit, penalize, or prevent” a worker from seeking or accepting new employment or starting a business, such clauses may be deemed a non-compete clause and subject to the prohibitions of the Rule, as determined on a case-by-case basis.

Furthermore, the FTC has defined “worker” to include employees, independent contractors, externs, interns, volunteers, apprentices, and/or a sole proprietor who provides a service to a person; it includes both current and former workers, paid or unpaid workers, and full-time or part-time workers without regard to the worker’s title.

Does the FTC Rule Apply to You?

The FTC Rule applies to all types of businesses in nearly all industries except for those businesses/industries that fall outside of the FTC’s jurisdiction and are, therefore, not subject to the Rule, such as banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits.

The FTC Rule applies to you if: 

1. You are a business entity such as a partnership, corporation, association, limited liability company, other legal entity, or a division or subdivision thereof in any industry, and

2. You do not fall outside of the FTC’s jurisdiction, and

3. You have executed, or currently execute, non-compete agreements or other restrictive covenants with workers, and/or you have, or have had, policies that impose similar restrictions or obligations, whether written or oral.

What Does the FTC Rule Prohibit?

As of the effective date of the Rule:

1. Businesses will be prohibited from entering into, or attempting to enter into, a non-compete clause or agreement as defined by the FTC with any worker, nationwide;

2. Existing non-compete agreements will be unenforceable unless one of the exceptions below applies;

3. Businesses will be prohibited from attempting to enforce a non-compete clause or agreement as defined by the FTC unless an applicable exception applies;

4. Businesses will be prohibited from making representations that a worker is subject to a non-compete clause or agreement, and;

5. Handbook policies and oral statements that impose non-compete restrictions will also be prohibited.

Are There Exceptions to the FTC Ban on Non-competes?

The FTC Rule contains a few limited exceptions to the prohibitions outlined above:

1. Senior Executives. Noncompete agreements executed with senior executives prior to the effective date of the Rule will still be enforceable moving forward, but businesses are prohibited from entering into any new non-compete agreements with senior executives, as with all other workers, as of the effective date of the Rule.

The FTC has narrowly defined “senior executives” to whom this exception applies. Senior executives whose non-competes remain enforceable must (a) earn at least $151,164 in annual compensation in the preceding year, and (b) hold a policy-making position with final authority to make policy decisions that control significant aspects of the business. 

A “policy-making position” is defined to include a business entity’s President, CEO, and/or officers with the equivalent policy-making authority over the business. Workers who merely have the power to advise or exert influence over policy decisions will not meet this definition, and their non-competes will be rendered unenforceable under the Rule. 

2. Bona Fide Sale of a Business. Non-competes entered into pursuant to a bona fide sale of a business entity, of a person’s ownership interest in a business entity, or all or substantially all of a business entity’s operating assets are not subject to the FTC ban. 

3. Prior Cause of Action. Non-compete-related causes of action that accrued prior to the Rule’s effective date are not limited under this Rule. Such causes of action may proceed. 

4. Good Faith Belief that the FTC Rule Does Not Apply. It is not an unfair method of competition to enforce or attempt to enforce a noncompete agreement or clause, or to make representations about a noncompete clause, where a person has a good faith belief that the FTC’s Rule does not apply.

Notice Requirements

Businesses and persons who have entered into non-compete agreements or clauses with workers, or who have or had written or oral policies in place imposing similar restrictions, must provide clear and conspicuous notice to each affected worker on or before the effective date of the Final Rule. Former workers still subject to the terms of a non-compete must also be provided notice.

The notices must: (1) state that the worker’s non-compete clause will not, and legally cannot, be enforced against the workers; (2) identify the person who entered into the non-compete clause with the worker; and (3) be in writing and delivered (a) by hand to the worker, (b) by mail to the worker’s last known personal address, (c) by email at the worker’s current work or last known personal email address, or (d) by text message to the worker’s mobile number. 

The FTC has model language that businesses may use for such notices, linked here for your convenience.

How Do You Protect Your Business’ Confidential, Proprietary, Trade Secrets Information Now?

The FTC Rule does not prohibit all confidentiality and/or non-disclosure agreements. Businesses may still enter into confidentiality agreements and non-disclosure agreements that are narrowly tailored to protect the legitimate interests of the business and are not overly broad in the obligations and restrictions imposed. Similarly, some narrowly drafted co-worker and/or customer non-solicitation agreements and clauses may be permissible under some circumstances. In all such cases, businesses are encouraged to review these clauses with legal counsel to ensure that they are carefully drafted to avoid running afoul of the FTC Rule.

Further, federal and state Trade Secrets laws, such as the Ohio Uniform Trade Secrets Act, provide protections from the misappropriation of trade secrets information and a cause of action through which a business may seek recourse from the courts to address any actual or threatened misappropriation of its trade secrets that may arise.

Action Items Required to Comply with the Rule

1. Review and evaluate your existing restrictive covenants, including but not limited to non-compete, non-solicitation, confidentiality, and non-disclosure clauses within an employment agreement, stand-alone restrictive covenant agreements, and handbook policies or other communications to workers imposing the same or similar restrictions and obligations. You will likely need to update or modify all or some of the above to comply with the FTC Rule moving forward. 

   Note that some states impose more stringent prohibitions on the use and enforcement of non-compete agreements than will be required under the FTC Rule. This is not currently an issue under Ohio law, but businesses with workers in other states will need to ensure compliance with the more stringent state laws, where applicable. 

2. Review your personnel records to identify which workers are subject to a noncompete clause or agreement, including your terminated employee personnel records for workers still within the effective period of any such non-compete clause or agreement executed during their employment. 

3. Identify which, if any, of the workers are subject to such non-compete agreements meet the FTC’s definition of a “senior executive” and whose non-competes remain enforceable after the Rule takes effect.

4. Provide written notice on or before the effective date of the Rule to all workers subject to an existing non-compete restriction or obligation that such non-competes will no longer be enforced against them. Notices must be provided to all affected workers, current and former, where such obligations exist. Notwithstanding, notice is not required for workers who fall under one of the above exceptions and whose non-competes will, as such, remain enforceable.

5. Going forward, (a) only existing senior executive non-competes will survive, and (b) only upon a bona fide sale of a business will new non-competes be executed (subject to compliance with state law, where applicable). 

Businesses are encouraged to consult with a trusted legal professional to ensure that all restrictive covenants, agreements, and policies comply with the FTC’s Rule and ensure that notice requirements are met prior to the effective date. The effective date will be added to this article once that information is available.