Introduction:
On April 23, 2024 the U.S. Federal Trade Commission (FTC) approved a proposed final rule which bans new non-competition clauses in employment contracts for most workers across the United States. The ban stems from the FTC’s view that non-competition clauses suppress wages and unfairly limit competition in violation of Section 5 of the Federal Trade Commission Act.
This groundbreaking change in the law of non-competes is of significant importance to those employers and other service recipients who place value on non-compete agreements, and to those employees and other service providers who are adversely affected by non-competes.
Implications of Ban:
Once the new rule goes into effect, existing non-compete agreements will become unenforceable, and employers will be required to provide notice to both current and former workers that their noncompete clauses are no longer enforceable. Employers will also need to reconsider forfeiture-for-competition provisions (which are often included in stock awards or deferred compensation plans) because the FTC’s non-compete prohibition extends to terms or conditions of employment that penalize workers for violating non-competition covenants.
There is a grandfathering provision for senior executives (workers earning more than $151,164.00 per year who are in a “policy-making position”) who have non-competes that were entered into before the final rule’s effective date, but employers may not enter into or enforce new non-competition agreements with senior executives. Certain not-for-profit entities are exempt from the final rule. and non-competes entered into pursuant to a bona fide sale of a business entity may also remain in place.
Timing:
The ban goes into effect 120 days after it is published in the Federal Register, on August 22, 2024. It does not apply retroactively to causes of action accruing before the final rule’s effective date. For example, if an alleged breach occurred before the final rule goes into effect, the ban would not apply.
It is important to note that enforcement is likely to be delayed by legal challenges. This sweeping ban has already received negative feedback from various business groups, and the U.S. Chamber of Commerce has already sued the FTC, arguing the regulator has overstepped and the non-compete ban should be blocked. An injunction is likely to be sought to halt the rule from imminently taking effect. Although the rule appears to be motivated by the FTC’s goal of eliminating unfair methods of competition, there is substantial concern that the new rule will actually have the opposite effect and limit businesses’ ability to protect their legitimate trade secrets and confidential data.
State Law:
The final rule supersedes state laws to the extent, but only to the extent, that such state laws conflict with the final rule or would otherwise permit or authorize conduct prohibited under the final rule. The notice requirement in the final rule supersedes any state law with a conflicting notice requirement. Employers must comply with state laws that have stricter bans on non-competes.
What Employers Should Do Now:
Employers should review existing noncompetition agreements and identify categories of employees who may fall within an exception to the ban, including senior executives or employees involved in the bona fide sale of a business.
Once the final rule is published, employers should draft notices that, in accordance with the final rule, advise employees that they will not enforce non-competes after the final rule’s effective date. The notice should be sent to current and former employees, excluding senior executives who are exempt, before the final rule goes into effect. The rule includes model notice language and creates a safe harbor for employers that use the model notice.
Not-for-profits should perform a careful analysis to determine if they are subject to the final rule or if any of their businesses are subject to the final rule before any notices are sent to employees.
Employers should update existing offer letters and non-disclosure and confidentiality agreements to remove restraints on competition and other restrictive covenants that may no longer be enforceable under the new ban.
The ban does not nullify non-solicitation, non-recruitment, confidentiality, or non-disclosure agreements, but only if they do not have the impact or effect of a non-competition agreement. Such agreements should be carefully reviewed to ensure that they do not have provisions that would be considered non-compete language under the final rule.
Since non-competes have largely been governed by state law, an employer should review state laws where it has employees to determine whether those laws have even stricter bans on non-competes and other restrictive covenants that may apply after the final rule goes into effect, and how that could impact any agreements with employees.
Given the uncertainty surrounding the enforceability of the new rule, employers concerned with protecting their confidential and proprietary information should not only eliminate non-competes from their employment agreements but also carefully review and revise non-solicit, non-disclosure, and other restrictive covenants to ensure that they are narrowly tailored to protecting the employer’s confidential and proprietary information.
Employers should review and augment confidentiality clauses and consider limiting the sharing of propriety information and trade secrets to only those employees who really need to know.
Conclusion:
Employers are encouraged to discuss the impact of the ban on their business with their employment counsel. If you have any questions about the ban, or need assistance in crafting your restrictive employment agreements or understanding your state specific employment laws, please reach out to Katherine Brustowicz, David Gabor, Johanna Matloff, or Ginny Peabody (Senior Consultant) of The Wagner Law Group’s Employment Law Team. Mark Poerio and Drew Oringer of The Wagner Law Group’s Executive Compensation Group also have significant expertise in this area and are available to assist.