Quarter 2, 2024: Non-compete Provisions to be Nationally Unenforceable
Non-compete Provisions to be Nationally Unenforceable
By: Shareholder Spencer C. Pittman
On April 23, 2024, the Federal Trade Commission issued a final rule banning “non-compete” covenants on a nationwide scale. The ban would affect both existing and future non-compete provisions. The FTC explained its ruling was to promote competition, protect the fundamental freedom of workers to change jobs, foster new business formations, and increase innovation.
Generally speaking, a non-compete provision or covenant is a legal contract or clause within a contract restricting a person (usually an employee or business partner) from engaging in activities that compete with their employer or business associate. The primary purpose of a non-compete is to protect a company’s business interests, trade secrets, and confidential information by preventing former employees or partners from using that knowledge to benefit a competitor. The enforceability of non- competes varies widely by jurisdiction. Some states, such as Florida, have lenient rules on non– competes, which are often strictly enforced. Other states, such as Oklahoma, have stringent laws that highly scrutinize non-competes. The FTC’s final rule, however, would supersede all conflicting state law if the state’s law would permit or otherwise allow conduct that will be banned in the final rule.
The FTC’s final rule takes the more strictly
enforced approach by prohibiting employers from
entering into (or attempting to enter into) a non-
compete with a worker, which includes both employees and independent contractors. The final rule provides for certain exceptions to this ban. For example, employers may maintain existing non-competes for “senior executives” earning more than $151,164 annually and who are in policy-making positions. However, the rule does not permit new non-competes for these senior executives. Other exceptions to the final rule include non-competes pursuant to the bona fide sale of a business entity or the enforcement of non-competes that accrued prior to the effective date of the final rule (such as in litigation). The FTC’s rule also requires employers to post in a clear and conspicuous place a notice at the workplace that non-competes cannot be legally enforced against workers.
The FTC’s rule has an effective date of September 4, 2024. If you or your business have an existing non-compete with workers and have questions or concerns about its enforceability, please do not hesitate to contact Shareholder Spencer C. Pittman at [email protected].