The Federal Trade Commission (FTC) issued a final rule on Tuesday, April 23, banning noncompete agreements across the country. The FTC issued a proposed rule in January 2023 banning noncompetes, received a massive number of comments expressing concern about the proposed rule, but nevertheless left the rule largely intact, passing the final rule by a 3-2 vote. The final rule contains exceptions for existing noncompetes with senior executives (an exception not in the original proposed rule), as well as an exception for noncompetes that are part of certain transactions. The FTC Fact Sheet projects that the new rule will increase workers’ earnings by over $400 billion over the next decade, increase innovation, reduce health costs, and create over 8,500 new businesses each year.

The new rule will face immediate challenges. Texas tax provider Ryan filed a lawsuit on Tuesday, the same day the rule was issued, challenging the FTC’s authority to issue the rule. The company’s public statement argues that noncompetes actually promote innovation and encourage companies to invest in their employees. The case is pending in the Northern District of Texas before Judge Ada Brown. The U.S. Chamber of Commerce also issued a statement declaring that it will file litigation challenging the rule. Chamber of Commerce CEO Suzanne Clark proclaimed that “The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.” These challenges come as no surprise. Last year, Commissioner Christine Wilson, prior to resigning, filed a dissenting statement to the proposed rule predicting that the rule “will trigger numerous and likely successful legal challenges regarding the commission’s authority to issue the rule.”

Putting aside the politics and uncertainty, there is no question that there now are far greater risks for entering into noncompetes, whatever the outcome of the litigation challenging the rule. The new rule makes noncompetes (not subject to any exceptions) an “unfair method of competition” in violation of Section 5 of the FTC Act. The FTC previously signaled in a controversial policy statement that it intended to increase the scope of its Section 5 power and it now has done so in a dramatic way. Long story short, the FTC will be filing cases against employers who seek to enforce noncompetes. The FTC’s action also could increase the number of private lawsuits using antitrust theories to challenge a wide variety of employment restrictions. And the FTC’s action could also encourage more states to pass legislation limiting noncompetes. Well before the FTC’s final rule, some states, most notably California, had limited noncompetes, with Governor Newsom signing two noncompete bills in recent years, SB 699 and AB 1076.

Employers will also have to decide what to do with existing noncompetes. The issue is not just whether the risk of enforcing an arguably lawful noncompete is worth it but whether the employer has to give notice now to employees subject to arguably unlawful noncompetes. The FTC’s final rule requires employers to give this notice to employees and even includes a model form for employers to follow.

Finally, there also will be uncertainty about whether NDAs and other previously routine employment provisions now will be deemed unlawful. The “noncompete” rule applies to any “term or condition of employment” that “functions to prevent” a worker from moving jobs. It is easy to imagine an enforcer or plaintiff arguing that an NDA effectively prevents an employee from switching positions. While it is also easy to imagine the counterarguments—NDAs protect and promote innovation and encourage companies to invest in employees—it is not clear that those arguments will prevail or that the FTC would even enter into a case-by-case analysis of such provisions.