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04.30.2024 Legal News

Are Your Non-Competes Still Valid? A Summary of the New Federal Trade Commission Rule

On April 23, 2024, the Federal Trade Commission (FTC), pursuant to sections 5 and 6(g) of the Federal Trade Commission Act (the “Act”), issued their final “Non-Compete Clause Rule” (Rule). This Rule provides that non-competes constitute “unfair method(s) of competition,” with only a few, limited exceptions. Despite those few exceptions, the FTC considers the Rule to be a “comprehensive ban on new non-competes with all workers.” If upheld, it will also nullify and eliminate an overwhelming majority of pre-existing non-competes.

For purposes of the Rule, a non-compete clause or provision is 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.” A “worker” is defined to include “an employee, independent contractor, extern, intern, volunteer, apprentice or sole proprietor who provides a service to a person,” and is without regard as to the worker’s title or their status under any other federal or state laws.

Under the terms of the new Rule then, for-profit employers will be prohibited from the following:

  • Entering into new non-competes with any workers as of the effective date, which is 120 days after publication in the Federal Register; and
  • Enforcing existing non-competes with workers other than senior executives, as of the effective date. Senior executives are defined as those workers earning more than $151,164 annually and who are in a “policy-making position.” A “policy-making position” means an individual “with the final authority to make policy decisions that control significant aspects of a business entity[.]”

Additionally, the Rule requires employers to notify affected workers that their non-competes are no longer enforceable, and it provides model language to that effect.

There are a few instances and/or entities for which the Rule does not apply, including the following:

  • A franchisee in the context of a franchisee-franchisor relationship, although a “natural person who works for a franchisee or franchisor is covered by this Rule.”
  • Nonprofit, charitable and tax-exempt organizations. The FTC does not have jurisdiction over most nonprofit organizations, but it must be noted that the FTC does claim jurisdiction over nonprofits that actually operate for profit, or that operate for the profit of their for-profit members.
  • The bona fide sale of a business – non-competes are still permissible between the seller and buyer of a business.
  • Any cause of action related to a non-compete that accrued before the effective date of the Rule.

Not surprisingly, considering the massive reach of the new Rule and its retroactive application, several lawsuits challenging both the Rule and the FTC’s authority to issue such a rule have been filed already. One day after the Rule was announced, the Chamber of Commerce of the United States of America (Chamber) and others filed a Complaint for Declaratory and Injunctive Relief in the federal court for the Eastern District of Texas (Case No. 6:24-cv-00148). In the Complaint, the plaintiffs highlight, among other things, that “businesses have strong interests in preventing others from free-riding on those investments [into their personnel] or gaining improper access to competitive, confidential information.” Complaint, at ¶ 2. They also point out that, while each state has developed its own body of law to address when non-competes are enforceable or unreasonable, non-competes “have never been regulated at the federal level. Id., ¶¶ 4, 5. The plaintiffs then articulate four main arguments against the Rule: (1) the FTC lacks authority to issue regulations proscribing “unfair methods of competition;” (2) non-compete agreements are not categorically unlawful under the Act; (3) the Act does not authorize the FTC to issue retroactive regulations; and (4) FTC’s actions were arbitrary and capricious. Id., ¶¶ 18-22. The plaintiffs have asked the court to declare the Rule invalid and unenforceable, permanently enjoin the FTC from enforcing the Non-Compete Rule, and to issue an order delaying the effective date and implementation of the Rule until the court proceedings end.

So, as the battle over the viability and enforcement of the Rule plays out in the courts, what should employers do? All employers, regardless of their commercial nature, should consult with labor and employment attorneys to confirm whether the Rule applies to them, and to discuss alternate avenues for protecting their investments in personnel and in their trade secrets and confidential information. For example, this Rule does not extend to non-disclosure and confidentiality agreements, and may not extend to certain non-solicitation agreements that are narrowly tailored.