On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule to ban non-compete agreements and clauses nationwide, citing that the ban will promote competition by “protecting the fundamental freedom of workers to change jobs, increasing innovation and fostering new business formation”. Pending legal challenges, the rule is set to go into effect on September 4, 2024.

A non-compete agreement is “a contractual agreement that prevents an employee from competing with their employer after their employments ends”. Common language in non-compete clauses seeks to prohibit employees from going to a similar company that provides similar services to the company that the employee is leaving, or from starting their own business which may compete with their prior company. Before the FTC issued this outright ban, many states disfavored these types of agreements, and had required that these clauses be very limited in geographic scope and duration to be enforceable.

While there are a few exceptions (for example, non-profits and existing non-compete agreements with “senior executives”), the rule applies to most employers and US workers (including employees and independent contractors) and is retroactive, meaning that not only will the rule ban new non-competes after it goes into effect, but it may also invalidate any existing non-competes. This rule does not ban non-solicit agreements (agreements that do not allow a leaving employee to solicit a company's clients or customers), or non-disclosure clauses or agreements (clauses or agreements that require employees to keep certain information confidential). These clauses are still effective if an employer wants to limit an employee after that employee ceases working for the employer. However, the final rule does seek to prohibit even these clauses when the clauses are so broadly written that they would, in practice, prevent former employees from working. Specifically the rule states that non-disclosure agreements might function as non-compete agreements “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job”. Similarly, non-solicitation agreements may function as non-competes when “they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends”.

It is expected that employers and trade associations will challenge the FTC rule, and in fact, there have already been three such challenges, alleging among other things, that the FTC has overstepped its authority by instituting an outright ban on non-competes. Whether or not the FTC ban will be upheld may be a question that reaches all the way to the Supreme Court before there is any final determination on the issue. Sharma Law will continue to monitor the status of non-competes.