FTC Non-Compete Ban: What you need to know

Reed Smith partners Mark Goldstein (https://www.reedsmith.com/en/professi...) , Cindy Minniti (https://www.reedsmith.com/en/professi...) , and Michelle Mantine (https://www.reedsmith.com/en/professi...) come together to break down the Federal Trade Commission's final rule on non-compete agreements and how it may affect U.S. businesses.



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Intro: Hello, and welcome to Dealmaker Insights, a podcast brought to you by Reed Smith's corporate and finance lawyers from around the globe. In this podcast series, we explore the various legal and financial issues impacting your deals. Should you have any questions on any of the content, please contact our speakers. 



Mark: Welcome back, everyone, to Dealmaker Insights. My name is Mark Goldstein. I'm a partner in Reed Smith and Labor and Employment Group, and I'm joined by my colleagues, Cindy Minniti and Michelle Mantine, both partners as well at the firm. Today's topic is non-compete agreements. Been all over the news lately. Non-compete agreements have long been used by businesses to bar key employees from leaving their business and going and setting up shop across the street the next day. There are a whole host of reasons why businesses may want to impose a non-compete agreement on an employee. However, over the past several years, state legislators have worked increasingly scrutinized the use of non-compete agreements that passed a whole host of legislation. And finally, the U.S. Federal Trade Commission in April 2024 issued a final rule that if it takes effect, would prohibit virtually all pre-existing and future non-compete agreements across the U.S. So I'd like to turn it over to my colleagues today, Cindy and Michelle, and together we'll break down what the Federal Trade Commission's final rule says and how it may impact U.S. businesses. So, Cindy, let me start with you. Can you tell us a little bit about the background to the rule? 



Cindy: Sure. Thanks, Mark. Like you said, there have been a lot of state legislation recently over the last couple of years, really trying to limit the use of non-compete agreements. And President Biden in July of 2021 directed the Federal Trade Commission to come up with some federal legislation really limiting the use of non-compete agreements. In an effort to really be wide sweeping in January of 2023, the FTC put out a proposed rule, which got a lot of attention from businesses and a lot of people commented on the proposed rule during the comment period. There were about 26,000 comments to the proposed legislation. And then ultimately, the proposed rule is now out as of May of this year, it was published in the Federal Register. And like you said, if it does go into It will go into effect in September. But it really is an absolute ban to non-compete agreements. There are very, very limited exceptions, but this is really an absolute ban on current and future non-compete agreements for virtually everyone. There's a small exclusion for senior executives and some other minor exclusions, but really this is an effort to really stop people from really enforcing non-competes on their workforce, really open up people and to be able to go to competitors. It's also interesting that it's not just for employees. The proposed rule is for anyone that's really doing work. So So employees, contractors, anybody that's got any kind of a relationship. So independent contractors, interns, it's really very broad sweeping. 



Mark: That's a great point, Cindy. And the definitions within the final rule are really key and are extremely broad. The definition of worker, as you said, the definition of non-compete clause is quite broad. Michelle, let me ask you, because I know that this is a question a lot of our clients have asked. We understand that future non-compete agreements after the rule takes effect, if it takes effect in September as the currently scheduled effective date, those would not be above board. But what about pre-existing non-compete agreements? I know Cindy alluded to it, but how does the final rule adjust pre-existing non-competes? 



Michelle: No, it's a great question, Mark. And as Cindy said, it's pretty broad sweeping. Yes, the final rule absolutely applies to pre-existing non-compete agreements. There is sort of or are limited exceptions. The exception that I would note here in particular is for pre-existing non-compete agreements entered into with senior executives. And that term, like so many of the other definitions that accompany this rule, is defined very carefully and specifically in terms of what it means to be a senior executive. And if you fall outside of that category, the ban does apply. With respect to those other pre-existing non-compete agreements, those not with senior executives, I mean, the ban is saying, as Cindy pointed out, that the agreements will not be enforced. First, they are illegal, and that w...