The Federal Trade Commission Issued a Ruling Banning Non-Compete Agreements Nationwide

Non-compete agreements have generally been unenforceable in California, absent limited exceptions. Now, pursuant to a recent ruling by the Federal Trade Commission (“FTC”), the prohibition of non-compete agreements may soon spread across the country. On April 23, 2024, the FTC issued a final rule banning non-compete agreements nationwide, for the stated purposes of promoting competition, protecting the freedom of workers to change jobs, increasing innovation, and fostering new business formation.

The FTC has labeled non-compete agreements as a method of unfair competition. “Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,” said FTC Chair Lina M. Khan. The FTC estimates that its prohibition of non-competes will lead to an increase in new business formations, and higher earnings for workers. In addition, the FTC’s ruling is expected to promote innovation, leading to an increase of more patents each year for the next 10 years.

The FTC’s ruling banning non-compete agreements is expected to become effective on September 4, 2024. After the effective date, existing non-competes for the vast majority of workers will no longer be enforceable. Existing non-competes for senior executives can remain in force under the FTC’s rule, but employers are banned from entering into or attempting to enforce any new non-competes, even if they involve senior executives. The FTC has proposed trade secret laws and non-disclosure agreements as viable alternatives to non-compete agreements.

The FTC’s blanket ban on non-compete agreements is expected to cause problems for many businesses, including insurance carriers and program management firms. Business groups led by the U.S. Chamber of Commerce quickly filed a lawsuit against the FTC in an effort to block the non-compete ban, arguing that it is too broad for an executive branch agency, and it is not backed by a mandate from Congress. “The Commission’s categorical ban on virtually all non-competes amounts to a vast overhaul of the national economy,” the Chamber states in the complaint. The rule “reflects an unlawful and unprecedented exercise of bureaucratic power.”

As it currently stands, it is uncertain whether the FTC’s ruling will survive the immediate legal challenges it faces. However, employers should take steps to prepare for the possibility that this comprehensive federal ban on new non-compete agreements will go into effect as planned on September 4, 2024.