The Federal Trade Commission adopted a Final Rule on April 23, 2024, that essentially guts nearly all non-compete agreements nationwide 120 days after publication in the Federal Register. Any non-compete agreement entered once the Final Rule is in effect, will be considered unenforceable and a violation of the FTC. Existing non-compete agreements can remain in force for “senior executives” who earn both more than $151,164 and are in a “policy making position.” A policy making position is defined as someone who is an executive officer or equivalent, any other officer of a business entity who has policy making authority or someone else who has policy making authority for the business like an officer.
Prior to the Final Rule being in effect, employers are required to identify non-compete agreements that will be unenforceable and send a notice to all employees who have executed the non-compete agreement in their organization to inform the employee that the non-compete portion of their agreement or their agreement is no longer valid. If you have a non-compete provision in an employee’s employment agreement that is invalid, you should put a line through that portion of the agreement with initials and a cover letter and/or have the employee execute a new employment agreement. If you have non-compete agreements that meet the exception, i.e., a senior executive who earns more than $151,164 and is in a policy making position then I would send that person a letter discussing that his/her non-compete is still in effect.
The one exception to this rule is if there was a bona fide sale of a business. The sale of a business must involve the disposition of the person’s ownership interest in the business entity or all or substantially all the business entity’s operating assets. Any non-compete clause entered by a person pursuant to the sale of their business or the person’s ownership interest in the business will still be enforceable and new agreements will be able to be entered into in this context after the effective date of the rule.
We believe there will be significant legal challenges to this Final Rule. So, take inventory of who at your organization has a non-compete. Draft notices for the individuals who’s non-compete will no longer be effective once the Federal Rule is in effect and sit tight to see how the litigation will play out.
