Non-compete clauses have taken a huge hit, but the conversation about their enforceability is far from over. On April 23, 2024, the Federal Trade Commission (FTC) voted to issue its final “Non-Compete Clause Rule,” 16 CFR Part 910. The new Rule provides that a non-compete clause is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act. The new Rule will take effect 120 days after its publication in the Federal Register.

The Rule defines a non-compete clause as “a term or condition of employment that prohibits a worker from penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” 16 CFR § 910.1. The term or condition may be a contractual term or a workplace policy, and it may be written or oral. Id.

Under the new Rule, existing non-competes for senior executives (defined as a worker earning more than $151,164 annually who is in a policy-making position with respect to the entire business enterprise) remain enforceable. But new non-competes, even for senior executives, may not be entered into after the effective date of the Rule. For all other employees, even existing non-competes will be unenforceable upon the effective date of the Rule. In addition, employers must provide workers who have an existing non-compete with “clear and conspicuous notice” that the non-compete will not be enforced against the workers. The Rule includes model language for that notice. 

Having addressed what the Rule will change, it should be noted that the Rule does not:

• Affect other types of restrictive covenants, such as appropriately tailored non-disclosure or confidentiality agreements;

• Expressly ban non-solicitation agreements, which are commonly used in employment and independent contractor agreements (but note under the new rule such agreements may be declared unenforceable if those provisions go too far such that they, in essence, prohibit competition);

• Impact causes of action for violation of an existing non-compete accrued prior to the effective date of the Rule; or,

• Prohibit a non-compete entered pursuant to a bona fide sale of a business entity.

Where states have conflicting laws, the Rule will preempt them. That impacts Tennessee, where non-competes have historically been permitted but generally disfavored by the courts because they restrain competition. Once the new Rule becomes effective, non-competes (except pre-existing non-competes for senior executives) will be unenforceable even inState courts.

The Rule is already the subject of litigation. The U.S.Chamber of Commerce and other business groups filed suit the day after theFTC’s vote in the U.S. District Court for the Eastern District of Texas. TheChamber-led plaintiffs argue the FTC lacked the authority to issue the Rule and asking the court to overturn it. The FTC, on the other hand, claims thatCongress gave the FTC authority to promulgate the new Rule in Section 6(g) of the FTC Act, which authorizes the FTC to make rules and regulations for the purpose of carrying out the provisions of the Act (including the Section 5prohibition of unfair methods of competition).

Thompson Burton’s Employment Law practice group is available to assist you in navigating the effect of the new Rule on your current and prospective business practices.

‍