On April 24, 2024, with a 3-2 vote, the Federal Trade Commission (FTC) moved to ban most noncompete agreements for most workers. This move, which follows a proposal introduced in January 2023, was opposed by two dissenting commissioners who argued that the FTC lacks the authority to enact such a rule.

The Non-Compete Clause Rule explicitly prohibits nearly all noncompete clauses for employees, applying both to future and existing agreements, with some specific exceptions, including:

1. Current noncompete agreements that involve “senior executives,” (i.e., those making over $151,164 and who are in policymaking roles), however new agreements for such executives will not be allowed;
2. Noncompete clauses that are part of a legitimate sale of a business; and
3. Enforcement of noncompete violations that occurred before the rule takes effect is still permitted.

Furthermore, the rule allows companies to enforce or discuss noncompete clauses if they have a good faith believe the rule does not apply to their situation.

The FTC also addressed concerns about forfeiture-for-competition clauses, which are typically part of deferred compensation packages for executives. These are included in the broad prohibition, potentially allowing executives to retain unvested stocks after leaving a company, regardless of new employment.

For existing noncompete agreements, employers are required to inform all current and former employees (except senior executives) that such clauses will not be enforced against them. This notification must occur before the rule becomes effective and is provided in multiple languages by the FTC.

The rule does not apply to other types of restrictive agreements such as confidentiality and nondisclosure agreements, non-solicitation, non-recruitment, and no-hire restrictions, along with training repayment obligations and garden leave conditions.

Looking forward, unless Congress or the courts intervene, the rule will become effective approximately 120 days after its publication in the Federal Register, expected around August 21, 2024. It may be subject to repeal under the Congressional Review Act (CRA), particularly as Congress is considering several CRAs. Legal challenges are anticipated based on arguments that the FTC has exceeded its authority and that the rule infringes on state contract laws. Of course, in California most noncompetes are unenforceable.