FTC Bans Non-Compete Agreements

Update: The U.S, Chamber of Commerce and several business groups have filed a lawsuit against the FTC alleging the ban is too wide reaching and the FTC has overstepped it’s legal authority.

Often used in employment and separation agreements, the U.S. Federal Trade Commission (FTC) has approved a proposed final rule banning most new noncompete clauses in employment contracts. The rule defines “noncompete clause” to mean a contractual term that blocks a worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends.

The rule makes all existing noncompete agreements unenforceable except for those covering senior executives, defined as workers earning more than $151,164 annually who are in a policy-making position.  It also requires employers provide notice to current and former workers that their noncompete clauses are no longer in effect.

 The rule also applies in some cases to agreements that require employees to pay back the employer for training costs if the worker’s employment terminates within a specified time period.

All current state laws limiting noncompetes would be preempted unless they provide greater worker protection than the FTC rule.

The rule goes into effect 120 days following its publication in the Federal Register. Enforcement could be further delayed by likely legal challenges. The U.S. Chamber of Commerce has already pledged to sue the agency over the rule.

 We are continuing to monitor this situation and will provide updates.