An estimated thirty million workers in the United States are subject to non-compete clauses, which contractually limit a party’s ability to work for competing businesses after their current employment ends. Historically, non-compete clauses have served as valuable tools to help employers retain talent while protecting trade secrets, proprietary data, and confidential customer information. Starting as early as August 22, 2024, employers in all 50 states will lose the protections of non-compete clauses in most existing employment contracts, and new non-compete agreements will be completely banned.
On April 24, 2024, the Federal Trade Commission (“FTC”) published its Final Non-Compete Clause Rule, which “provides that it is an unfair method of competition … for employers to, inter alia, enter into non-compete clauses with workers … The Commission thus adopts a comprehensive ban on new non-competes with all workers.” 16 C.F.R. § 910.1. The rule is set to take effect on August 22, 2024, unless legal challenges to the rule delay its effective date. For non-compete agreements existing prior to the effective date, the rule distinguishes between “senior executives”—narrowly defined to include persons who earn more than $151,164 per year in a “policy-making position"—and all other workers. Senior executives represent less than 0.75 percent of the workforce in the United States. Non-compete agreements will remain in effect for senior executives, while non-competes for all other workers will become unenforceable.
Before the FTC issued its final rule, the enforceability of non-compete clauses was primarily a matter of state law. State standards varied widely, with some states adopting strict standards to prohibit or limit enforceability, while other states adopted lenient standards that favored enforcement. California is among the states with the most stringent restrictions on non-competes and has a longstanding public policy that non-competes are generally unenforceable. See Edwards v. Arthur Andersen, 44 Cal. 4th 937 (Cal. 2008) (adopting public policy against enforcement of non-compete clauses in employment contracts). See also Cal. Bus. & Prof. Code, §§ 16600 (“every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”), 16600.1 (subject to narrow exceptions, “[i]t shall be unlawful to include a non-compete clause in an employment contract”). For states like California with a prior policy limiting the enforcement of non-compete clauses in employment contracts, the FTC ban will have less impact on employers within the state.
Conversely, for states with lenient standards favoring the enforcement of non-compete clauses—Delaware, Massachusetts, Texas, and Georgia, to name a few—the FTC’s final rule banning non-competes likely will preempt the conflicting state laws that allowed non-competes to be enforced. Compare City of New York v. F.C.C., 486 U.S. 57, 64 (1988) (“[t]he statutorily authorized regulations of a [federal] agency will pre-empt any state or local law that conflicts with such regulations or frustrates the purposes thereof.”), with Wyeth v. Levine, 555 U.S. 555 (2009) (no preemption where state tort law imposed stricter standards for drug regulation compared to federal standards, and the state law was complementary to the federal agency’s consumer protection objective). For the states that previously enforced non-compete clauses, the rule will invalidate existing non-competes for all workers other than senior executives. Since senior executives represent less than one percent of workers nationwide, the FTC’s final rule will invalidate the majority of existing non-competes in these states.
For now, employers with workers in the United States should consult with experienced counsel to ensure compliance with federal regulations governing non-compete agreements. When the FTC rule becomes effective, pre-existing non-compete clauses will remain enforceable for senior executives, while non-competes for all other employees will be invalidated. If an employment contract with a non-compete clause does not contain a severability provision, then there is a risk that the unenforceable provision could invalidate the entire contract. Employers are encouraged to review and revise existing contracts and may want to consider alternatives to non-compete clauses, including contract provisions governing confidentiality, non-disclosure, non-disparagement, data privacy, and trade secret protection.
In the immediate future, we anticipate that there will be appeals and litigation to challenge the FTC’s prohibition of non-compete clauses in employment contracts. We will continue to monitor this topic and will provide further updates as developments occur. If you have any questions about this rule or any other legal developments, please contact the authors or Gordon Rees Scully Mansukhani's Employment Law team for more information.