The US FTC’s Non-Compete Ban: What Global Tech Firms Need to Know

Partner
May 6, 2024
3 min read

Updated: Aug 13

Navigating the shifting legal landscape on employee mobility and restrictive covenants

Non-compete clauses have long been a standard tool for tech companies to protect intellectual property, client relationships, and confidential know-how. In April 2024, however, the US Federal Trade Commission (FTC) finalized a groundbreaking rule that would ban most non-compete agreements nationwide. While the rule is currently paused by court challenges, it represents a seismic policy shift that could have far-reaching implications not only for US businesses, but also for international companies with US operations, US-based employees, or US-facing contracts.

Why This Matters for Tech and Digital Industries

Technology firms — whether in software development, fintech, gaming, or e-commerce — often depend on non-compete clauses to reduce the risk of competitors hiring away key talent and immediately leveraging proprietary knowledge. The FTC’s rule, if it survives litigation, will strip away that safeguard for most workers, requiring companies to find new strategies for protecting their competitive edge.

This is especially significant for sectors where knowledge transfer can be instantaneous and product cycles are short.

A departing senior developer or business development executive could join a rival in days, bringing valuable insight into product roadmaps, pricing models, or strategic plans.

Key Features of the FTC Rule

The final rule, issued on 23 April 2024, broadly prohibits employers from entering into or enforcing non-compete clauses with employees, independent contractors, interns, and even some senior executives. Key points include:

Broad scope: Applies to almost all workers, regardless of industry or seniority, with a narrow exception for certain pre-existing non-competes with senior executives earning more than $151,164 annually.
Retroactive effect: Requires employers to provide written notice to current and former employees that their non-compete clauses are no longer enforceable.
No “functional equivalents”: Prohibits contractual terms that act as de facto non-competes, even if not labeled as such.

The Legal Fight Ahead

Almost immediately after publication, several business groups and state attorneys general sued to block the rule, arguing that the FTC exceeded its statutory authority. Federal courts have issued stays, preventing the rule from taking effect while litigation proceeds. The ultimate outcome may rest with the US Supreme Court, which could rule on whether the FTC has the power to impose such a sweeping nationwide ban.

For now, non-competes remain enforceable under state law, but the regulatory tide is clearly shifting. Even without the FTC rule, several US states (including California, Minnesota, and Oklahoma) already ban or sharply limit non-competes, and others are tightening restrictions.

What International Tech Firms Should Do Now

Companies with US-linked operations, employees, or customers should prepare for a future where non-competes may be off the table. That means:

Re-evaluate restrictive covenants: Strengthen non-disclosure agreements (NDAs) and invention assignment clauses to ensure protection of confidential information and IP.
Enhance onboarding/offboarding processes: Implement exit interviews, return-of-property protocols, and reminders of confidentiality obligations.
Invest in culture and retention: Focus on employee engagement, career development, and competitive compensation to reduce voluntary departures.
Segment access to sensitive data: Limit exposure of proprietary information to those who truly need it.
Monitor legal developments: Track both the FTC litigation and state-level legislation to adjust compliance strategies quickly.

Looking Ahead

Whether or not the FTC’s non-compete ban survives in its current form, the policy trend in the US is unmistakable: greater worker mobility, fewer contractual restraints, and increased reliance on alternative protections. For tech businesses, this will require a cultural and contractual shift — from restricting movement to managing risk in more nuanced, legally robust ways.

If your company operates in the US and relies on non-compete clauses to protect critical assets, now is the time to plan for change. Our team advises international tech firms on workforce mobility, IP protection, and contract strategy in light of evolving US and global employment laws. If you need professional advice, contact us for a consultation.