The Federal Trade Commission is Set to Implement New Rule Prohibiting Noncompete Clauses

The Federal Trade Commission (FTC) has implemented a new, transformative rule, set to take effect 120 days after its publication in the Federal Register, prohibiting noncompete clauses across most employment sectors and applying to all employees, except current “Senior Executives”. This sweeping change intends to enhance labor mobility and spur economic innovation by allowing employees to switch jobs or start new ventures without facing legal barriers. FTC Chair Lina M. Khan cites the rule’s potential to significantly raise worker earnings and stimulate the creation of thousands of new businesses annually.

Businesses that traditionally relied on noncompete agreements to protect sensitive information and maintain competitive advantages may need to reassess how they safeguard intellectual assets and business interests in the future. Businesses may need to pivot towards alternative protective measures, including confidentiality agreements, and rely on state and federal trade secret laws.

The FTC’s final rule also streamlines compliance for employers. Rather than rescinding noncompete clauses formally, businesses must notify employees that such clauses will no longer be enforced. The FTC has provided model language to facilitate this communication to ease the transition for businesses and ensure clarity for workers regarding their rights.

Whether the new rule will go into effect is difficult to predict. Less than one day following the FTC’s publication of the new rule, the U.S. Chamber of Commerce, along with several other business groups, challenged the regulation in federal court, claiming the FTC exceeded its authority in attempting to regulate noncompete contracts. As with any litigation, it will be time-consuming, and the outcome is uncertain.

Regardless, the important takeaway from the FTC’s action is that this rule is just another steppingstone in a growing trend that disfavors non-compete provisions in employment contracts. It should serve as an important reminder for businesses to proactively review their employment strategies and implement additional protective measures that focus on confidentiality and appropriate security protocols.

For detailed insights and strategic advice on drafting restrictive covenant agreements, employers should consult Levin Ginsburg’s employment law practice group. This includes Walker Lawrence, Mitchell Chaban, and Camila Kaplunov.