FTC Issues Final Rule Banning Employment-Related Non-Compete Agreements. What's Next?

By Sally A. Piefer - Lindner & Marsack, S.C.

April 29, 2024

Non-compete and non-solicitation agreements are relatively commonplace in the employment context. However, these agreements have been under increasing attack by state legislatures across the country. Shortly after President Biden took office, he issued an Executive Order on Promoting Competition in the American Economy and encouraged the Federal Trade Commission (FTC) to ban or limit non-compete agreements.

The FTC stated in a virtual workshop on competition later that year that it believed non-competes constitute an unfair method of competition. Last January, the FTC announced that it took legal action against three companies, suing them to prevent the use of unlawful non-compete restrictions. See https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers. Shortly thereafter, the FTC released a proposed rule which would prohibit all non-compete agreements—except for those between buyers and sellers of a business. https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.

More than 26,000 comments were submitted in favor of and against the proposed rule. Last week, the FTC issued its final rule governing non-compete agreements. Absent a stay in connection with a legal challenge, this final rule is slated to take effect 120 days after the final rule is published in the Federal Register.

The final rule provides that it is an unfair method of competition to (i) enter into or attempt to enter into a non-compete clause; (ii) enforce or attempt to enforce a non-compete clause or (iii) represent that a worker is subject to a non-compete clause.

The final rule defines a “non-compete” 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 the 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.”

The final rule does not prohibit a non-compete during the course of employment and it does not impact the use of non-competes used in connection with the sale of a business setting, or existing lawsuits related to a non-compete clause.

This means that all existing non-competes would be void – with the exception of non-competes for “senior executives” – who are defined as a worker who is in a “policy-making position” and received total compensation from the employment of at least $151,164 in the preceding year. “Policy-making position” means a business entity’s president, CEO or the equivalent, or any other officer of a business who has policy-making authority. Notably, 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 is considered to have policy-making authority, but a 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.

In addition to banning non-compete agreements, the final rule also imposes an obligation on employers to provide affected workers with clear and conspicuous notice to the worker by the effective date that the non-compete clause will not be, and cannot legally be enforced against the individual. The notice must either be hand-delivered or sent by email, regular mail or text message.

The final rule is silent with respect to non-solicitation and confidentiality clauses, so presumably those types of clauses, to the extent they are reasonable, will continue to be enforced under applicable state law.

Within a day of the release of the final rule, at least two lawsuits have been filed in the federal courts in Texas challenging the rule. We anticipate that one (or both) of the courts may likely stay the implementation of the final rule, pending resolution of the litigation. A stay cannot be requested until the final rule is actually published in the Federal Register.

Next Steps? We will continue to follow the pending litigation and provide relevant updates which affect non-competes. However, in the interim, it would be prudent to take an inventory of the agreements you currently have in place with current and former employees and independent contractors and determine whether those agreements contain any non-compete clauses. We recommend that legal counsel determine whether those agreements contain severability language to preserve any non-solicitation, confidentiality or other contractual obligations. You should also review your Employee Handbooks and determine whether they contain any language which could reasonably be considered a non-compete.

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