Use this button to switch between dark and light mode.

FTC Ban on Noncompete Agreements: What In-House Counsel Need to Know

June 05, 2024 (4 min read)


By Elias Kahn | LexisNexis Practical Guidance  

The Federal Trade Commission (FTC) finally delivered on a long-awaited order when it issued a final rule on April 23, 2024, that bans most noncompete agreements nationwide between employers and employees.

“Noncompete 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 noncompetes are banned,” said FTC Chair Lina M. Khan, in the agency’s press release. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market.”

An estimated 18% of U.S. workers (i.e., about 30 million Americans) are subject to noncompete agreements.

But no sooner was the ink dry on the FTC’s order than multiple organizations filed a flurry of lawsuits to stay the final rule, which is slated to go into effect on September 4. There are three primary pending legal challenges to the FTC’s noncompete ban, according to a Morgan Lewis LawFlash post, with court guidance expected by early-July. These legal challenges could result in a partial or complete stay of the FTC’s noncompete ban.

If the court allows the ban to be implemented, it would be one of the broadest expansions of agency authority in the FTC’s history, as reported by Law360®.

Morgan Lewis lawyers with expertise in restrictive covenants contributed an insightful Practical Guidance article for LexisNexis®, FAQs on Federal Trade Commission’s Rule Banning Worker Noncompete Clauses. The article provides key insights for in-house counsel, including specific guidance on what employers should do before the rule’s effective date if it becomes law later this year, including:

  1. Monitor legal challenges

Employers should closely monitor the various legal challenges to enforcement of the rule before taking any action as the lawsuits could enjoin or invalidate the final rule.

  1. Audit existing noncompetes

Employers should conduct an audit of existing noncompete agreements in place to determine which workers are exempt from the FTC’s noncompete ban. For example, the noncompete ban does not apply to “senior executives,” who are workers making more than $151,164 and in policy-making positions. The FTC’s rule requires employers to notify current and former workers who are non-senior executives and who are bound by existing noncompetes that they will not be enforcing any noncompete restrictions against these workers.

  1. Consider negotiating with “senior executives” currently not subject to noncompetes

Employers should determine whether any “senior executives” (as defined above) are currently not subject to noncompetes and consider negotiating with these individuals to enter into a noncompete agreement before the final rule’s effective date. The FTC’s rule gives employers a relatively short window to execute noncompetes with “senior executives” so in-house counsel may wish to take advantage of that window if the rule becomes effective.

  1. Consider implementing Garden Leave Provisions

Garden leave requires employees to provide a specific amount of notice before resigning. During the notice period, the employee will not compete with the employer and will fully or mostly stop working for the employer, but the employee stays on the employer’s payroll. The FTC’s commentary on garden leave provisions suggests that noncompete restrictions that run concurrent with ongoing employment are still permitted, even if employers significantly or entirely restrict a worker’s job duties or access to colleagues and the workplace.

  1. Review other restrictive covenants

Employers can continue to implement Customer and Employee Non-Solicitation Agreements and Confidentiality Restrictions where legally permissible by applicable state law. However, in-house counsel should narrowly tailor those restrictions to ensure they are not deemed functional noncompete clauses prohibited by the FTC’s noncompete ban or state law.

Next Steps in Navigating the FTC Noncompete Ban: Proactive Strategies for In-House Legal Teams

The outcome of the pending litigation regarding the FTC’s rule will have enormous implications for employers and employees alike. In the meantime, what can in-house legal teams do to challenge the FTC noncompete ban right now?

The time to provide comments to the FTC has passed, so the only avenue available to employers now is to participate in litigation against the FTC. For example, Law360® reported that nearly a dozen national and international trade associations have filed a joint amicus brief in federal court supporting efforts to prevent the noncompete rule from taking effect.

In-house counsel need to track developments surrounding this FTC rule closely and be prepared to revisit any restrictive covenants if it becomes law. Practical Guidance from LexisNexis offers a number of resources to assist with this review, including the Restrictive Covenants Resource Kit and Non-compete Agreements: Key Negotiation, Drafting, and Legal Issues, a practice note. Get a free trial of Practical Guidance for access to these resources.

All of these news, analysis, and practical guidance resources regarding the FTC noncompete are accessible from Lexis+® General Counsel Suite. Lexis+ GC Suite is an all-in-one information resource designed for the modern GC that provides in-house counsel with a vast collection of legal resources, breaking business and legal news and essential practical guidance content. Experience it for yourself by requesting a free 7-day trial of GC Suite.