On April 23, 2024, the U.S. Federal Trade Commission (“FTC”) published its Final Rule abolishing employment non-competition agreements. The Final Rule does not go into effect until 120 days after its date of publication in the Federal Register (the “Effective Date”).

The Final Rule states that non-competition agreements constitute an unfair method of competition and, therefore, violate Section 5 of the FTC Act. After the Effective Date, employers will be prohibited from: (i) entering into or attempting to enter into non-competition agreements with employees, (ii) enforcing or attempting to enforce existing non-competition agreements with employees, or (iii) representing to employees that they are subject to a non-competition agreement.

Additionally, preexisting non-competition agreements will become invalid and unenforceable as a matter of law. Employers must provide all employees who have preexisting non-competition agreements with written notice that they are no longer enforceable. There is model language for the required notice in the Final Rule.

There is a limited exception for senior executives. Non-competition agreements between employers and senior executives existing before the Effective Date remain in force and effect. However, employers will still be prohibited from: (i) entering into or attempting to enter into new non-competition agreements with senior executives on or after the Effective Date, (ii) enforcing or attempting to enforce non-competition agreements entered into with senior executives after the Effective Date, or (iii) representing to senior executives that they are subject to non-competition agreements enter into after the Effective Date.

The Final Rule defines non-competition agreements as a term or condition of employment that prohibits a worker from, penalizes a worker for, or prevents a worker from: (i) seeking or accepting work in the United States with a different employer or person where such work would begin after the conclusion of the employment that includes the term or condition, or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition. The term or condition is not limited to written stand-alone non-competition agreements or written employment agreements that include a non-competition covenant or clause. The prohibited term or condition may also include oral agreements as well as employment policies.

The definition of a worker protected by the Final Rule is expansive and includes, in addition to employees, independent contractors, interns and externs, volunteers, apprentices, or sole proprietors, as well as persons who work for franchisors or franchisees. The Final Rule does not cover franchisees with legitimate franchisee-franchisor relationships. In addition, the Final Rule does not apply to non-competition agreements entered into by a person pursuant to a bona fide sale of a business entity. Significantly, the Final Rule does not apply where a cause of action related to a non-competition agreement accrued prior to the Effective Date and, therefore, does not apply to non-competition litigation preceding the Effective Date.

It should also be noted that the Final Rule preempts state laws that conflict with the Final Rule.

Judicial challenges to the validity of the Final Rule have already been filed in multiple jurisdictions. It remains to be seen whether the Final Rule will survive judicial scrutiny or a newly constituted FTC.

It is essential for employers to familiarize themselves with the Final Rule and to revise their employment and restrictive covenant agreements accordingly.