On April 23, 2024 the Federal Trade Commission (“FTC”) voted to approve a new Rule prohibiting all noncompete agreements. The Rule will become effective 120 days after publication in the Federal Register and will impact an estimated 30 million employees throughout the United States. The Rule will immediately void all noncompete agreements except existing agreements with Senior Executives (defined as workers earning more than $154,164 per year and who are in policy making positions), but new agreements with Senior Executives are prohibited.
The FTC Rule was approved along party lines with the three Democratic members voting for the Rule and the two Republican members voting against the Rule. As of April 24, 2024, two separate entities, the U.S. Chamber of Commerce and Ryan, LLC, a tax services firm, have filed legal challenges to the FTC Rule. The lawsuits, which are filed in separate federal courts in Texas, are expected to delay the Rule’s implementation.
Currently, the enforcability of noncompete agreements is determined by State statutes or case law that often limits or modifies the subject matter, geographic scope and/or time periods of noncompete agreements. Recently, California enacted a statute like the FTC Rule that prohibits all noncompete agreements and requires employers to notify employees that noncompete agreements are no longer enforceable.
The FTC Rule defines a noncompete agreement as a term or condition that either “prohibits” a worker for “penalizes” a worker for or “functions to prevent” a worker from (a) 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 (b) operating a business in the United States after the conclusion of the employment that includes the term or condition.
Significantly, the Comments to the FTC Rule state that the term “function to prevent” “does not categorically prohibit other types of restrictive employment agreements, for example, NDAs, TRAPs, and non-solicitation agreements.” Thus, even if the FTC Rule survives judicial scrutiny, there will be other avenues for preserving customer relations and protecting trade secrets.
If you would like to discuss the impact of the FTC Rule or planning for its implementation, please contact Bob Bodzin at 215-496-7242 or rbodzin@kleinbard.com or Lorena Ahumada at 215-496-7227 or lahumada@kleinbard.com.
