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Don’t Leave Me This Way: Update on Non-Compete Agreements

Many employers, as a condition of employment and in an effort to protect trade secrets, customer lists and confidential employee information, have routinely required employees to sign agreements prohibiting the employees from working for a competitor or starting a competing business after their employment ends. These agreements are known as non-compete agreements. For the past several years, states have increasingly enacted laws and courts have issued rulings reining in such clauses. For example, five states, including California, Colorado, Minnesota, North Dakota, and Oklahoma, have banned covenants not to compete in most scenarios. The COVID-19 pandemic, starting in early 2020, employees working more frequently from home since then, and the ensuing Great Resignation[1] are often cited as reasons for limiting the lawfulness and effect of non-compete clauses.[2]

After over a year-long public comment period, on April 23, 2024, the Federal Trade Commission (“FTC”), which is the federal agency charged with protecting consumers from anti-competitive, deceptive, and unfair business practices, issued a Final Non-Compete Clause Rule (the “Final Rule”).[3] The Final Rule, with limited exceptions, bans the use of non-compete agreements nation-wide, with the FTC stating that such an agreement “is an unfair method of competition. .  .”[4] The rule goes into effect on September 4, 2024 (the “Effective Date”). However, almost immediately after the Final Rule was announced, two powerful business lobbying groups, the Chamber of Commerce and the Business Roundtable, along with other business groups, brought lawsuits challenging the legality of the Final Rule. As discussed in more detail below, depending upon the outcome of such challenges, the Effective Date may be delayed. 

The enforceability of non-compete clauses in employment contracts, including separation agreements, equity grants, and others, has historically been governed by state law, so employers wishing to include non-competition clauses in such contracts and which operate in multiple states have had to navigate the applicability of various state laws and their differing legal tests regarding the enforceability of such clauses, resulting in uncertainty and inconsistent results from state to state. The effect of the Final Rule, should it survive the various legal challenges that have been made against it, will be a uniform law, thus possibly eliminating the need for an employer to engage in this cumbersome process.

The FTC states that about 18% of U.S. workers are covered by non-competes and “estimates that banning non-competes will mean

  • More innovation: an average of 17,000-29,000 more patents each year
  • More startups: a 2.7% increase in new firm formation – that’s 8,500+ new businesses per year
  • Higher earnings: typical workers earn $524 more per year.”[5]

This article summarizes the Final Rule’s requirements for employers, the exceptions to the Final Rule, the challenges that have been lodged against the Final Rule, and the steps employers should take going forward.

What does the Final Rule provide?

The Final Rule prohibits employers from entering into non-compete agreements with employees and independent contractors, preempting all state laws, but only to the extent that they permit the conduct prohibited by the Final Rule. The Final 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.”

The Final Rule is retroactive and requires employers to provide clear and conspicuous notice to employees, former employees, and independent contractors in a communication to each affected individual that their non-compete clause will not be enforced against them. This notice must identify the person who entered into the non-compete clause with the employee and be sent to each affected employee by hand, mail, email or by text message before the Effective Date. The Final Rule contains model notice language fulfilling this requirement.

The Final Rule does not state that it bans other forms of restrictions in contracts, including non-disclosure agreements or non-solicitation agreements. However, the Final Rule clearly states that if those other forms of restrictions have the same effects as non-compete clauses, that is – “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job,” they violate the Final Rule.  According to the Final Rule, such clauses, even if they are not labelled non-compete agreements, “function to prevent a worker from working for another employer in the same field and are therefore non-competes” subject to the Final Rule.

What are the exceptions to the Final Rule?

One exception to the Final Rule is that employers can maintain existing non-compete agreements with senior executives, defined as those who are making over $151,164 annually and who are in policy making positions. However, after the Effective Date, employers will not be permitted to enter into a non-competition clause with anyone, including senior executives.

In addition, the Final Rule does not apply where the non-compete agreement is entered into in connection with the bona fide sale of the business. The Final Rule also does not apply to not-for-profit enterprises, banks, savings and loans, federal credit unions, common carriers, air carriers and foreign air carriers, and live-stock, dairy, poultry and egg products businesses.

Employers may still seek to enforce non-compete clauses where the cause of action related to the agreement has accrued prior to the Effective Date or where the employer has a good-faith basis to believe the Final Rule is inapplicable.

What challenges have been made to the Final Rule?

There have been several challenges made to the Final Rule in the courts. Three lawsuits are currently pending in federal courts[6]  – one in the Northern District of Texas,[7] one in the Eastern District of Texas,[8] and another in the Eastern District of Pennsylvania.[9] These challenges generally raise legal arguments as to why the Final Rule cannot withstand constitutional scrutiny. For example, litigants have argued that the Final Rule constitutes a “major question,” which requires clear and direct authority from Congress, which the challengers argue is lacking, to engage in rulemaking authority where the issue being regulated has “vast economic and political significance.”[10] Another argument made against the Final Rule is that it is “an impermissible delegation of authority under the Non-Delegation Doctrine.” The U.S. Supreme Court has held that under that principle, Article I of the U.S. Constitution grants legislative powers to Congress and those powers may not be transferred to another agency. In addition, the lawsuits argue that the Final Rule is arbitrary and capricious, with less intrusive means available to fulfill the FTC’s stated goal of stimulating competition in the American economy.[11] Further, litigants will now assert that the courts considering their arguments do not need to give deference to the FTC, given that the U.S. Supreme Court  recently overturned the Chevron deference principle,[12] which for four decades required courts to defer to an agency’s reasonable interpretations of their statutes where ambiguity existed.[13]

What actions should employers take now?

The Final Rule is not yet in effect and if it is not enjoined by virtue of the above described legal challenges, it will not be effective until September 4, 2024. In the meantime, employers should follow developments in the legal challenges to the Final Rule and take steps to send the notices described above to the individuals who are affected by the Final Rule, including identifying those employees, former employees and contractors with non-compete agreements, and ensuring that the Company has their contact information in the event notification of the invalidity of their non-competes is necessary. Employers should also determine which employees may qualify as senior executives whose non-compete agreements are exempt under the Final Rule. Employers should also consider whether they have employees who could qualify as senior executives enter into non-compete agreements before the Effective Date. Finally, if there are agreements in place that should be enforced, employers should take steps to enforce those agreements as soon as possible as the Final Rule does not apply where a cause of action to enforce a non-compete clause is commenced before the Effective Date. Finally, even if the Final Rule is enjoined, employers should take this opportunity to review their existing agreements with employees to ensure that the scope and the duration of the non-competes are reasonable and comply with applicable state laws.

[1] Beginning in early 2021, the Great Resignation was a trend in the U.S. in which employees resigned voluntarily from their jobs during the COVID-19 epidemic. Employees cited as reasons for resigning “wage stagnation, amid rising costs of living, limited opportunities for advancement, hostile work environments, lack of benefits, inflexible remote work opportunities and long-lasting job dissatisfaction.”

[2] Kelly James, “Do Covenants Not to Compete Have a Shelf Life: A Look at Current Missouri Law,” June 4, 2024,


[4] Federal Trade Commission, Non-compete Rule,

[5] Id. (Emphasis in original).


[7] Ryan, LLC v. Federal Trade Commission, Case No. 3:24-cv-986  

[8] Chamber of Commerce v. Federal Trade Commission, Case No. 6:24-cv-00148

[9] ATS Tree Services, LLC v. Federal Trade Commission, et al., Case No. 2:24-cv-01743

[10] Cary Reid Burke, Jesse Coleman, J. Marc Fosse, Gary Friedman, Daniel Hart, Kevin Mahoney, Dawn Mertineit, Robert Milligan, Marcus Mintz, Katherine Perrelli, Suzanne Saxman, Michael Wexler, “FTC Non-Compete Ban: What You Need to Know (UPDATED), June 12, 2024,

[11] See fn.6

[12] Chevron v. National Resources Defense Council, 467 U.S. 837 (1984)

[13]Loper Bright Enterprises v. Raimondo, et al., Case No. 22-451 (U.S. Sup. Ct. June 28, 2024).