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The Federal Trade Commission (FTC) issued a final ruling on April 23, 2024, that would impose a nationwide ban on non-compete clauses in employment agreements, as well as stand-alone non-compete agreements—whether written or oral. Several business groups greeted this announcement with a lawsuit the very next day that seeks to void the new FTC rule. Unless blocked by a court, the nationwide non-compete ban could take effect before the end of August.
California law has long barred enforcement of non-compete agreements. As we reported last October (view here), a new state law dramatically expanded those limitations, and explicitly prohibits California employers from entering into non-compete agreements with employees or prospective employees.
The new FTC rule—first proposed in January 2023—would bring the rest of the nation in line with California’s ban on non-compete agreements. It defines a banned “non-compete clause” as “a term or condition of employment” that either prohibits, penalizes, or “functions to prevent” any “worker” from:
- “seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition”; or
- “operating a business in the United States after the conclusion of the employment that includes the term or condition.”
The rule defines the term “worker” very broadly to include employees, independent contractors, unpaid interns and volunteers, sole proprietors, and anyone else “who provides service to a person.” It categorizes non-compete clauses as an unfair method of competition, which violates the Federal Trade Commission Act first passed by Congress in 1914.
All new non-compete clauses and agreements would be banned outright once the FTC rule takes effect. In addition, existing non-competes would become unenforceable for all workers except those who fit the definition of “senior executive”—for example, a president, CEO, or other officer with policy-making authority, with minimum annualized compensation of at least $151,164 during the previous year.
Under the rule, even attempting to enforce a pre-existing non-compete against anyone other than a “senior executive” would be unfair competition. And once the rule takes effect, it would be unfair competition to even attempt to enter into or enforce a non-compete with any worker, including any “senior executive.” However, it is not unfair competition to attempt to enforce a clause if the person has a “good-faith basis to believe” it does not fall under the ban on non-competes.
The rule also does not apply to non-competes “pursuant to a bona fide sale of a business entity,” or a person’s ownership interest in the entity or substantially all of its “operating assets.” California law contains a similar exception.
The rule provides that it would “preempt” any state laws that conflicts with the new federal ban on non-competes. However, it would not otherwise affect enforcement of state laws that restrict non-competes. For this reason, the FTC rule probably won’t affect enforcement of California law.
In announcing its new rule, the FTC suggested that employers have “several alternatives” to non-competes for protecting their investments, including trade secret laws and non-disclosure agreements.
Takeaways for Employers
The FTC rule, if not blocked by the courts, will have a profound impact on all multi-state employers. The effect on employers who operate exclusively in California is likely to be less dramatic, given our state’s preexisting laws against non-compete agreements. However, all employers must review their agreements and policies to ensure compliance with both state and federal laws.
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