FTC Bans Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (FTC) enacted a significant regulatory measure: the prohibition of non-compete agreements. It’s important to understand the implications that this decision may have on business’ hiring practices going forward.

Unbelievably, the first known case involving a noncompete agreement — Dyer’s Case — took place in 1414! Fast forward 610 years to find that non-compete agreements are commonly used by businesses to safeguard proprietary information, protect client relationships, and prevent unfair competition. It is estimated that nearly one in five Americans are subject to a non-compete.

The FTC’s action acknowledges the potential negative consequences that non-competes have on labor mobility, innovation, and market competition. The FTC reasoned that by banning non-competes nationwide, competition will be enhanced, workers will be free to change jobs, and innovation and new business creation will thrive. In issuing this new rule, the FTC stated that businesses can protect propriety information and protect client relationships with the use of non-disclosure and non-solicitation agreements—both of which are still permissible under the new FTC rule.

It’s important to note that the regulation’s effective date is 120 days after publication in the Federal Register - not immediately following this week’s public announcement. The new rule is scheduled to become effective in early August. Assuming the rule is not overturned, this marks a pivotal shift in the legal landscape surrounding employment contracts and business agreements.

The ban would make all current non-compete agreements unenforceable except those relating to certain senior executives. In addition, employers will be required to provide notice to workers (other than senior executives) who are bound by existing non-competes, that their non-competes would not be enforced against them. Furthermore, while the new FTC rule prohibits non-compete agreements, it does not impact a company's ability to enforce non-disclosure and non-solicitation agreements.

It's important to note that there is precedent which suggests that the FTC does not have the authority to issue regulations of this nature. Considering the expected legal challenge by the U.S. Chamber of Commerce against this new rule, it may be prudent to exercise caution and await the resolution of this litigation before making significant changes to any existing agreements. While the outcome of this legal challenge remains uncertain, staying informed and monitoring developments closely will aid decisions in the coming months.

If you are a business owner or senior executive who has questions, concerns, or requires further legal support regarding the FTC’s ban on non-compete agreements, please reach out to attorney Nick Goedde, 440.930.4001 or ngoedde@dooleygembala.com for consultation.