FTC ISSUES FINAL RULE BANNING NON-COMPETE CLAUSES
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FTC ISSUES FINAL RULE BANNING NON-COMPETE CLAUSES

25 Apr FTC ISSUES FINAL RULE BANNING NON-COMPETE CLAUSES

Posted at 18:40h in News by

 

On April 23, 2024, the Federal Trade Commission (“FTC”) issued its Final Rule banning non-compete clauses in all agreements between employers and their workers, subject to only a few exceptions. See 16 CFR Part 910. The FTC concluded that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into non-competes with most workers going forward and to enforce most existing non-competes. The FTC states that the Final Rule is “a comprehensive ban on new non-competes with all workers” and will invalidate most non-competes in place nationwide. The ban comes approximately a year-and-a-half after the FTC first published its proposed rule on the matter, and after a notice and comment period during which the FTC received nearly 27,000 public comments. The rule will impact thousands of employers and millions of workers and marks a substantial shift away from a state-by-state approach to the consideration and enforcement of non-compete agreements throughout the country. The Final Rule will become effective 120 days after publication in the Federal Register, which should happen in the coming days. However, there are likely to be numerous challenges in federal courts by various business groups and business interests, such as the U.S. Chamber of Commerce, who will seek to enjoin enforcement of the rule during the pendency of the challenges.

Summary of the Final Rule

Once effective, the Final Rule imposes a comprehensive ban on non-competes with most workers going forward and to enforce most existing non-competes. It is unfair competition “(i) To enter into or attempt to enter into a non-compete clause; (ii) To enforce or attempt to enforce a non-compete clause; or (iii) To represent that the worker is subject to a non-compete clause.” Employers must provide “clear and conspicuous notice” to all workers by the effective date that the “worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” The written notice must identify the person who entered into the non-compete clause with the worker and be delivered by hand to the worker, or by mail, email, or text message. The Final Rule provides model language for employers to use with their workers.

What is a non-compete clause covered by the Final Rule?

The Final Rule defines “non-compete clause” as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” This definition includes forfeiture-for-competition clauses, certain training-repayment agreements and certain liquidated damages provisions.

The Final Rule does not categorically prohibit confidentiality and non-disclosure provisions or non-solicitation provisions. The FTC commented that these provisions can be properly drafted so as to not meet the definition of non-compete clause stated above. As to any particular provision, however, the question will be whether the restriction is intended to serve the same function as a non-compete clause. The FTC stated, “As noted in this Part III.D, restrictive employment agreements other than noncompetes—such as NDAs, non-solicitation agreements, and TRAPs—do not by their terms or necessarily in their effect prevent a worker from seeking or accepting work with a person or operating a business after the worker leaves their job.” This means confidentiality and non-solicitation provisions are likely to continue to be enforceable (generally speaking) after the effective date of the Final Rule if properly drafted. As the FTC stated, “Whether a specific clause falls within the scope of the final rule will necessarily depend on the precise language of the agreement at issue, but the text of the final rule provides regulated parties with sufficient notice of what the law demands to satisfy any due process vagueness concerns.”

Are there any exceptions?

Yes, there are limited exceptions.

The Final Rule provides that existing non-competes with “senior executives” can remain in force until these agreements expire. Employers are prohibited from entering into new non-compete agreements, including extending existing non-compete agreements, with senior executives after the effective date of the Final Rule. The Final Rule defines “senior executive” as an individual who (1) is in a policy-making position; and (2) had a total annual compensation of at least $151,164 in the preceding year. The Final Rule further defines “policy-making position” as follows:

      • Policy-making position means “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.”
      • Policy-making authority means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”

 
There is also an exception to the non-compete ban for “bona fide sales of business.” The Final Rule states that the ban shall not apply to a non-compete clause “that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

The Final Rule also states that it does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date.”

What is next?

As stated, the Final Rule is set to become effective within 120 days of publication. It is likely there will be delays in the rule becoming effective due to court challenges, some of which are already being made, but employers should review their current employment agreements and make plans to address the notice and related provisions in the new rule.

For questions about the FTC Final Rule, or other questions concerning employment law and restrictive covenants, please contact Ben Prinsen or Aaron Aizenberg.



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