On April 23, 2024 the Federal Trade Commission (FTC) issued its final rule that prohibits most non-compete clauses. The rule is effective 120 days after its publishing in the Federal Register (scheduled for May 7). However, lawsuits challenging the rule have already been filed.

Prohibition on Non-Compete Clauses.

Clauses preventing employees, especially higher-paid executives, from leaving their employer and going to or starting a competing business (Noncompete) have been a feature of many employment agreements, severance plans, and incentive compensation for a long time. Court rulings and state legislation have limited the scope of enforceable Noncompetes over the years. For example, in California a Noncompete is only enforceable where it prohibits the seller of a business interest from competing with the sold business. In January of 2023, the FTC proposed a nationwide ban on Noncompetes for all workers, including executive and other highly paid employees or independent contractors.

The final rule deems Noncompetes an unfair method of competition. It prohibits employers from entering into Noncompetes in the future and voids existing Noncompetes. It also requires employers to notify applicable employees and former employees that their Noncompetes are no longer enforceable. A change from the proposed rule is that there is an exception for existing Noncompetes with “senior executives”. A senior executive is an individual earning more than $151,164 in the preceding year (which is the top 15 percentile for full-time salaried workers in the nation) who is in a “policy-making position”. This is quite narrow as to be in a policy-making position one must be: the president, CEO or equivalent of the business; an officer of the business who has policy-making authority; or a non-officer of the business who has policy-making authority similar to an officer. Policy-making authority means final authority to make policy decisions that control significant aspects of a business entity. It does not include authority to only advise or exert influence over policy decisions or authority to make policy decisions for a subsidiary but not the entire common enterprise. This narrow definition excludes many highly paid employees such as sales and investment professionals or executives without policy-making authority.

Similar to California law, the rule does have an exception for a Noncompete entered into by the seller of a business entity or that persons interest in a business entity or the sale of all or substantially all the assets of a business entity. The final rule expanded the proposed rule which limited the exception to sales by substantial owners of the business only.

Open Questions.

The rule defines a Noncompete as a contractual term between an employer and worker that: prevents the worker from seeking or accepting work in the United States with a person; or operating a business in the United States after the conclusion of the worker’s employment. Questions remain as to whether nonsolicitation clauses prohibiting the solicitation of customers or employees would constitute a Noncompete under the rule.

Court Challenges.

As soon as the FTC issued the final rule, two lawsuits were filed challenging it. The Chamber of Commerce of the United States was joined by the Business Round Table in a suit filed in the federal district court for the Eastern District of Texas. Another suit was filed in the Northern District of Texas by the business tax services firm of Ryan LLC. Other suits are expected. The suits argue that the agency exceeded its administrative authority when issuing such a broad prohibition. The suits ask for a stay of enforcement and preliminary injunction preventing the FTC from enforcing the rule before the litigation is concluded.

The FTC believes it has clear legal authority to issue the ban. It set forth its position in the lengthy preamble to the final rule.


If not affected by the court cases, the rule would not be effective until this September. Employers with existing Noncompetes should stay tuned to the litigation. However, employers should also begin to review all of its Noncompete agreements including those in employment agreements, severance plans, and incentive bonus plans to determine which are excepted as involving senior executives and which would not be enforceable if the rule stands. Additionally, if the rule stands, employers will have to reconsider whether changes to its benefit programs are warranted.