The FTC's Noncompete Rule Is Likely Dead on Arrival

Erik W. Weibust and Stuart M. Gerson, Members of the Firm in the Litigation & Business Disputes and Health Care & Life Sciences practices, co-authored an article in Law360, titled “The FTC's Noncompete Rule Is Likely Dead on Arrival.”

Following is an excerpt (see below to read the full version in PDF format):

The Federal Trade Commission issued its final noncompete rule on April 23. As expected, it is very similar to the proposed rule announced in January 2023. There are, however, a few changes, some more material than others.

First, the FTC included a very limited exception for preexisting noncompetes with senior executives — although not noncompetes with senior executives entered into after the effective date of the final rule. A senior executive is defined as "a worker who was in a policy-making position" and who received total annual compensation of at least $151,164. This is of marginal import, however, given that it is limited to preexisting agreements.

Similarly, the FTC excepted any causes of action that accrued before the effective date of the rule, which will likewise have a very limited impact given that there are only so many such claims.

And the FTC removed the requirement that employers rescind all existing noncompetes, but nevertheless requires employers to notify employees, in writing, that they are no longer enforceable and will not be enforced; in other words that is essentially just a change in nomenclature.

There are two — and perhaps a third — more impactful changes. First, the FTC removed the 25% equity threshold from the sale of a business exception, excluding all noncompetes entered into in connection with a bona fide sale of a business irrespective of the seller's ownership interest. This would bring it in line with California, and it addresses a big criticism of the proposed rule by the business community.

Second, the FTC removed the de facto noncompete language, but replaced it with a functional test for what constitutes a noncompete. This is likewise just a change in nomenclature and could be interpreted by the current or a future FTC to cover other types of restrictive covenants, such as nonsolicits.