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Update Aug. 21, 2024
Court Finds FTC Non-Compete Ban Unenforceable Nationwide
On Aug. 20, 2024, a United States District Court for the Northern District of Texas set aside the Federal Trade Commission’s Non-Compete Rule and ordered that the rule shall not be enforced or otherwise take effect on its effective date of Sept. 4, 2024. The Non-Compete Rule, which sought to ban all new (and most existing) non-compete agreements nationwide, has now been struck down.
The district court found that the FTC exceeded its authority in implementing the Non-Compete Rule and the Non-Compete Rule is arbitrary and capricious. The court also observed that the FTC provided no evidence as to why it chose to implement such a sweeping prohibition instead of targeting specific, harmful non-compete agreements. Nothing in the court’s order, however, prevents the FTC from continuing to adjudicate “unfair methods of competition” or an “unfair or deceptive act”—as they relate to non-compete agreements—on a case-by-case basis.
As a result, employers are not required to comply with the text of the Non-Compete Rule (including its notice requirements) by the effective date. The FTC indicated that it is considering an appeal of the district court’s order to the U.S. Court of Appeals for the Fifth Circuit, so employers should continue to monitor this evolving challenge to the Non-Compete Rule.
If you have questions about the new rule or its applicability to your agreements, please contact a Payne & Fears LLP attorney.
Watch our Webinar: Dissecting Restrictive Covenants and Non-Competes Sept. 12.
Update May 8, 2024
The final rule was published in the Federal Register on May 7, 2024, and its effective date is now Sept. 4, 2024.
Today, the FTC approved and issued its Final Rule that, in effect, bans all post-employment non-competes nationwide. The rule applies not only to new non-competes, but to most agreements already in force as well. Like the recent California rule, businesses are required to notify workers of the potential invalidity of any agreement. There is a brief delay before the rule goes into effect this summer (which could be delayed further by legal challenges), but businesses should prepare to act now to bring their agreements in line with the new rule.
Key Takeaways:
- The Final Rule will be effective 120 days after publication in the Federal Register, which assuming it is not delayed by litigation would be as soon as August 2024.
- The Final Rule prohibits employers from imposing any non-compete, which is broadly defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
- The ban is not limited to stand-alone non-compete agreements. It appears to apply to non-compete clauses in any agreement and workplace policies, whether written or oral.
- The Final Rule includes all “workers”—broadly defined as all individuals who work for the employer, whether paid or unpaid, and specifically includes employees, independent contractors, interns, volunteers, and sole proprietors.
- An exception applies to non-competes entered into pursuant to a bona fide sale of a business entity.
What about existing non-competes?
The effect of the Final Rule on existing non-competes will depend on the status of the worker.
- Non-senior executives
- Existing non-competes are no longer enforceable after the effective date if the worker is not a “senior executive.”
- By the effective date, employers will be required to provide a “clear and conspicuous” notice to workers with existing non-competes, that their non-compete will not and cannot be enforced against the worker. While the notice must be written, delivery of the notice can be in person, by mail, email, or by text message.
- In what is certain to be an extreme burden to employers, the above notice requirements will apply to both current and former employees with a non-compete.
- Senior executives
- Existing non-competes for a senior executive can remain in force.
The FTC reasoned that senior executives are less likely to be subject to the kind of acute, ongoing harms suffered by other workers subject to existing non-compete clauses.
To be considered a “senior executive” the worker must (1) earn more than $151,164 (based on the 85th percentile of earnings of full-time salaried workers nationally), and (2) be in a “policy-making position.”
A worker in a “policy-making position” includes the company’s president, CEO (or equivalent), or any other person who has “policy-making authority” similar to an officer.
The term “policy-making authority” means a person with authority to make policy controlling “significant aspects of a business entity or common enterprise.” The Final Rule specifically excludes workers who have authority “limited to advising or exerting influence over such policy decisions” and workers “having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”
What happens if I try to enforce a prohibited non-compete?
The Final Rule prohibits an employer from enforcing or attempting to enforce a non-compete with a worker. Employers are also prohibited from representing to workers that they are subject to a non-compete. Engaging in such conduct will be considered unfair competition unless the employer has a good-faith basis to believe that the Final Rule is inapplicable, e.g., that the worker is subject to an enforceable non-compete.
What about contract provisions that are similar to non-competes?
The Final Rule as written broadly defines the term “non-compete clause” and may extend to other types of restrictive employment agreements that functionally serve as a non-compete.
Thus, agreements that have the “effect” of prohibiting workers from seeking or accepting other work may be banned under the Final Rule. This may include non-solicitation agreements and NDAs. Making this determination will be a fact-specific inquiry and will often turn on the language used in the agreement.
For example, a typical NDA in which the worker agrees not to disclose certain specific confidential information to a competitor may be acceptable. Compare this to an NDA that is so broadly worded that it bars a worker from disclosing any information that is usable in or relates to the worker’s industry. Such an agreement functionally serves as a non-compete and cannot be enforced.
The Final Rule is unclear, but it likely will not prohibit non-competes that are in effect only during the worker’s employment. This may also include garden leave provisions where the worker remains employed.
Potential Challenges to Final Rule
The Final Rule makes clear that it “shall supersede” any state laws inconsistent with the requirements of the Final Rule. We expect many legal challenges to the Final Rule in the coming months, including those based on whether the FTC has the authority to nullify millions of existing agreements and declare those agreements unlawful. Indeed, business groups led by the U.S. Chamber of Commerce have already sued the FTC seeking to block the Final Rule. These challenges may delay the effective date of the Final Rule.
If you have questions about the new rule or its applicability to your agreements, please contact a Payne & Fears LLP attorney.
