Client Alert: FTC Adopts New Rule On Noncompetes, Prompting Immediate Challenge

On April 23, 2024, the Federal Trade Commission voted 3-2 to adopt a final rule regarding noncompetition agreements that, upon becoming effective, would render many existing and new agreements unenforceable. The U.S. Chamber of Commerce and other parties have filed litigation challenging the new rule.

More information on the FTC’s new rule is available below. Please reach out to Malcolm Heinicke, Carolyn Luedtke, Miriam Kim, Bethany Kristovich and Laura Smolowe to learn more.

 
Key Provisions of the New Rule

The FTC’s new rule defines noncompetition agreements as any “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” either “seeking or accepting work” or “operating a business” after their employment ends.

The new rule has both retrospective and prospective components:

• Retrospectively, the rule prohibits enforcement of many existing noncompetition agreements. Employers must notify workers covered by this rule that existing noncompetition agreements cannot and will not be enforced. The rule does not apply retroactively to existing agreements with “senior executives”—defined as a worker who held a policy-making position and received $151,164 or more of total annual compensation for that role excluding benefits.
• Prospectively, after the rule’s effective date, it prohibits new noncompetition agreements for workers including senior executives.

The rule includes certain exceptions, including where a noncompetition agreement is part of the bona fide sale of a business entity, where a cause of action related to a noncompetition agreement accrued prior to the rule’s effective date, and where an employer has a good faith belief the rule does not apply to them. The final rule states that it applies to covered persons or entities within the FTC’s jurisdiction.

The rule is set to go into effect 120 days after its publication in the federal register.

Differences from Proposed Rule

The new rule originated with a proposed rule issued by the FTC in January 2023, which was subject to a public comment period and generated over 26,000 responsive comments.

The final rule differs in some key respects from that original proposal:

• The proposed rule did not originally distinguish between senior executives and other workers and would have applied retroactively across all classes of workers. By contrast, the final rule exempts senior executives from its retroactive provisions, as described above.
• The proposed rule required formal rescission of covered noncompetition clauses, while the final rule adopted by the FTC requires notice to covered workers but not formal rescission.

Challenges to the Rule

The rule prompted immediate legal challenges. On April 23, 2024—the same day the rule was announced—tax services firm Ryan LLC sued the FTC to vacate the new rule. On April 24, 2024, the U.S. Chamber of Commerce, together with Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, sued the FTC and Chair Lina Khan to block the new rule. These lawsuits are pending in the United States District Courts for the Northern District of Texas and Eastern District of Texas, respectively.