By Brad Ryder
As anticipated, on April 23, 2024, the Federal Trade Commission (“FTC”), by a vote of 3-2, issued its Final Rule, which bans virtually all employment-related non-compete agreements. The Final Rule becomes effective on September 4, 2024. Significant litigation is expected in relation to its enforceability.
The Final Rule makes it an “unfair method of competition” for anyone acting on behalf of a “business entity” to: 1) enter into or attempt to enter into a non-compete agreement; 2) enforce or attempt to enforce a non-compete agreement; or 3) represent that a “worker” is subject to a non-compete agreement.
“Business entity” includes virtually all for-profit businesses, whether corporations, partnerships, or natural persons. Similarly, “worker” is not limited to employees, but also includes independent contractors, volunteers, apprentices, and even sole proprietors who provide services to a customer. Thus, the applicable scope of the Final Rule is expansive and not limited to traditional employer-employee relationships.
The Final Rule applies regardless whether the non-compete agreement is currently in effect or entered into after September 4, 2024. There are, however, a few exceptions to this blanket prohibition: 1) non-compete agreements entered into prior to September 4, 2024, with employees who qualify as “senior executives”; 2) non-compete agreements involving the sale of either an owner’s interest in a “business entity” or the sale of substantially all of the assets of a “business entity”; and 3) lawsuits involving the alleged breach of a non-compete agreement, provided that such alleged breach occurred prior to September 4, 2024.
“Senior executive” is defined as a “worker” who makes at least $151,164.00 per year (including non-discretionary bonuses and commissions, but not including payments for medical or life insurance, contributions to retirement plans, and similar fringe benefits) and who is the president, the CEO, or has the authority to make policy decisions controlling “significant aspects of a business entity or common enterprise.” Merely advising or exerting influence over policy decisions is insufficient for this exception to apply. The FTC estimates that this exception will apply to less than 1% of all workers.
The Final Rule further permits a “business entity” to enforce a non-compete where there is a “good faith” belief that the Final Rule is inapplicable.
The Final Rule applies nationwide and supersedes all contrary state laws, unless they afford broader protection to “workers” than the Final Rule.
Because of the broad definition set forth in the Final Rule, “non-compete clause” could be construed to include other similar restraints on future employment, such as non-disclosure agreements, non-solicitation agreements, and confidentiality agreements. Whether such a restraint on future employment qualifies as a “non-compete clause,” as defined under the Final Rule, must be made on a case-by-case basis, which will result in litigation in relation to this issue.
A violation of the Final Rule could result in the FTC either: 1) filing an administrative proceeding; or 2) filing a lawsuit in federal court to obtain an injunction. The Final Rule does not allow for a private cause of action against the “business entity.”
The Final Rule requires “business entities” to notify “workers” by September 4, 2024, that any non-compete agreements covered thereunder will not be and cannot be enforced against the “worker.” The Final Rule includes a model notice to be provided to “workers,” which can be accessed at: https://www.ftc.gov/system/files/ftc_gov/images/new-rule-image-noncompete-rulev3.png.
At least three lawsuits (two in Texas and one in Pennsylvania) have already been filed that challenge the enforceability of the Final Rule and additional litigation is expected. Collectively, the lawsuits contend that the Final Rule is unconstitutional and exceeds the FTC’s statutory authority under the Federal Trade Commission Act and seek a declaration that the Final Rule is unenforceable.
The FTC’s issuance of the Final Rule probably raises more questions than it answers. On its face, the implications of the Final Rule seem straightforward – non-compete agreements between an employer and an employee are, except in limited circumstances, no longer enforceable. However, whether the Final Rule is enforceable, either in its entirety or in some modified version, remains an issue that must resolved by the courts, which could take years.
Employers are advised to review current non-compete agreements, non-solicitation agreements, non-disclosures agreements, and related documents to make a preliminary determination as to whether they would violate the Final Rule. Employers should not rescind any existing non-compete agreements or notify employees (current or former) that such agreements are no longer enforceable until the courts have offered guidance as to the enforceability and proper interpretation of the Final Rule.
Keep in mind that the Final Rule will not go into effect until, at the earliest, September 4, 2024. If the Final Rule is ultimately deemed enforceable, employers should consider whether other restrictions on employment, such as confidentiality agreements or proprietary information agreements, should be revised so that they are more likely to be deemed enforceable. This is particularly true if such agreements include a non-compete provision.
If you have questions about drafting or enforcing employment policies, to include non-compete, non-solicitation, or non-disclosure agreements, or other employment-related issues, feel free to contact me at (256) 534-3288 or brad@ryderlaw.com.
This information is not intended to provide legal advice, and no legal or business decision should be based on its content. No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers. Read full disclaimer.
