The FTC Joins California in Banning Most Non-Compete Agreements Across the United States

The FTC Non-Compete Ban

In a controversial 3-2 vote, the Federal Trade Commission (the “Commission”) finalized the Commission’s much-anticipated final rule that would ban most non-compete agreements in employer-employee relationships across the nation for covered employers (“FTC Rule”).  The FTC Rule took a page out of California’s playbook as it mirrors much of California’s ban on non-compete agreements. 

The FTC Rule prohibits covered employers from doing the following unless an exception applies:

• Entering into or attempting to enter into a non-compete agreement
• Attempting to enforce a non-compete agreement
• Representing that a worker is subject to a non-compete agreement  

For existing non-compete agreements, the FTC Rule further requires covered employers to notify workers with those non-compete agreements that the non-compete provisions will not and cannot legally be enforced against that worker. The FTC Rule includes sample language for the notice.

What are the exceptions to the FTC Rule?

• Sale of a business: A bona fide sale of all or substantially all of the seller’s interest in the business
• Senior executives: An employer may still enforce an existing non-compete agreement against a senior executive but may not require senior executives to enter into a new non-compete agreement. The rule defines the term “senior executive” as a worker earning more than $151,164 who is in a “policy-making position.” 

How Does the Final Rule Impact California’s (and Other States) Non-Compete Agreement Laws?

California has long prohibited non-compete agreements pursuant to Business and Professions Code § 16600 et seq. Like the FTC Rule, it allows non-compete agreements when selling a business. In January 2024, California took its non-compete ban a few steps further with two new laws: SB 699 and AB 1076.

• SB 699 voids any agreement to restrain post-employment competition, except for the sale or dissolution of a business, partnership, or LLC, regardless of where the worker signed the contract and where the employment was maintained. An employer who enters into or attempts to enforce a non-compete agreement will have committed a civil violation and is subject to a private right of action where the employee, ex-employee or prospective employee can collect attorneys’ fees.   
• AB 1076 requires employers to notify employees or former employees who were employed after January 1, 2022, and signed a non-compete agreement that does not satisfy an exception to section 16600, that the clause or agreement is void. 

The FTC Rule will suspend contrary state laws that offer less protection than the FTC Rule.  Given the breadth of California’s non-compete laws, we do not expect them to be affected by the FTC Rule, except California businesses must comply with both sets of laws once the FTC Rule takes effect. Colorado, Minnesota, Oklahoma and North Dakota also have laws broadly banning non-compete agreements. More than 20 states have laws restricting non-compete agreements (but not a complete ban). Many of those laws will likely be preempted if they are found to be contrary to, and offer less protection than, the FTC Rule.

What Happens Next?

The FTC Rule will take effect 120 days after the date the FTC Rule is published in the Federal Register. However, that date may change since the U.S. Chamber of Commerce and other business groups are challenging the FTC Rule. These business groups acted promptly by filing a lawsuit against the Commission in Texas federal court the day after the FTC voted to enact the final rule. The business groups advance several arguments ranging from the Commission lacking authority to implement the rule to it being an arbitrary and capricious exercise of the FTC’s powers. The business groups also argue that non-compete agreements are not categorically unlawful and that the provision eliminating existing non-competes for all workers except for those in senior executive positions is “impermissibly retroactive.” 

A Dallas-based business tax firm has filed at least one other lawsuit, and there may be more to come. 

Implications on Employers

Employers concerned about the newly enacted FTC Rule may wish to take action now by having counsel review current employee agreements and template agreements to determine if any of the provisions constitute a prohibited non-compete agreement and to take any steps necessary to comply with the FTC Rule. Employers may also want to consider alternatives to non-compete agreements such as non-disclosure agreements or non-solicitation agreements, neither of which are categorically prohibited under the FTC Rule so long as the agreements are not overbroad. 

Employers seeking more information about the practical implications and challenges to the rule on non-compete agreements should contact their RJO attorney or the authors of this article.