On April 23, the Federal Trade Commission (FTC) approved on a split vote a proposed rule that bans virtually all employment noncompetition agreements nationwide. The rule was first proposed in 2023 and is scheduled to go into effect 120 days after it is formally published, which, for now, would be approximately late August 2024. Currently, there are four states that have banned noncompetition agreements in total (California, Minnesota, Oklahoma, and North Dakota) and a number of other states that have significantly restricted their use.

The final FTC rule bans as an unfair method of competition “any term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” either seeking or accepting later work in the United States with a different person; or operating a business in the United States after the conclusion of their employment. Only noncompetes that are tied to the sale of a business are exempt from this rule and still permitted going forward. 

The Final Rule adds a new exemption for noncompetes that currently apply to senior executives. This exemption is a change from the proposed rule and is based on the FTC’s assumption that agreements involving senior executives have been negotiated by counsel representing all parties. For this reason, the FTC’s rule will prohibit noncompetes with senior executives after the rule goes into effect, but will not require rescission of noncompetes currently in effect. The rule defines Senior Executives in detail, and requires them to be paid in excess of $150,000 annually.

Importantly, this rule is retroactive and not only prohibits employers from entering into prohibited noncompetes, but also requires employers to rescind any noncompete clause currently in effect. Additionally, employers must provide individualized notice – which can be by letter, e-mail, or text – of the rescission. The rule contains model language that employers can use to supply this notice.

But before you try to get ahead of the game and send those rescission messages, the courts likely will have a say on this rule. Both the U.S. Chamber of Commerce and a Texas accounting firm have already brought suit against the FTC in order to enjoin enforcement of the rule. Both suits allege, among other arguments, that the FTC lacks the authority to issue without clear Congressional authority.  Notably, the issue of the level of deference Courts must give to administrative agencies (often called Chevron deference from the case that established it) is already before the U.S. Supreme Court this term. We expect the FTC rule to be enjoined, at least while the courts consider these issues and make a final determination. Regardless, we will monitor the status of those challenges and make sure to update you on the latest.

Should you have any questions regarding the use of noncompetition agreements or any other questions regarding employment agreements, please do not hesitate to contact any member of the Spilman Labor & Employment Team.