FTC Finalizes Rule to Effectively Ban Noncompete Agreements
On April 23, 2024, the Federal Trade Commission (“FTC”) released its Final Noncompete Clause Rule (“Final Rule”), which effectively bans entering into and enforcing a majority of noncompete agreements between employers and their workers. The Final Rule will become effective and enforceable one hundred and twenty (120) days from the date of publication in the Federal Register.
*Please note that at the time of this writing, the Final Rule is scheduled to be published on May 7, 2024 in the Federal Register. If the Final Rule is published on that date, the effective date for the Final Rule will become effective on September 4, 2024.
The Final Rule has already been challenged in court[1] and will likely face numerous other legal hurdles and possible amendments before becoming law. However, knowing that this comprehensive change has been proposed by the FTC, there are a number of concerns that both employers and workers need to be aware of regarding noncompete agreements which are summarized below.
- Legal grounds for the noncompete agreement ban.
According to the FTC, noncompete agreements are an unfair method of competition and in violation of section 5 of the FTC Act, which prohibits deceptive or unfair methods of competition in or affecting commerce.[2] The Final Rule provides that it is an unfair method of competition and therefore a violation of section 5 for employers to, inter alia, enter into or enforce non-compete clauses with workers on or after the Final Rule’s effective date.[3]
B. Parties affected by the Final Rule.
All employers and workers who currently are party to a noncompete agreement and do not qualify for an exception will be affected by the proposed Final Rule. Worker is a defined term under the Final Rule and is purposefully written to be broad and inclusive. Under the Final Rule, a worker is a natural person who works, whether paid or unpaid, for an employer.[4] The term worker includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.[5] Classification under any other statute (e.g. FLSA) will not be determinative under the Final Rule.
C. Exceptions to the Final Rule.
There are a number of exceptions to the Final Rule that were carved out by the FTC. A few notable exceptions include:
- Parties to a bona fide sale of a business;[6]
- Current pending cause of action related to a noncompete agreement;[7]
- Entities exempt as outside of the FTC’s Jurisdiction (e.g. banks, credit unions, savings and loan institutions);[8]
- Non-profit organizations;[9] and
- Persons and businesses subject to the Packers and Stockyards Act of 1921;[10]
The FTC’s Final Rule also created an exception for what it considers to be noncompete agreements that were entered into with Senior Executives[11] before the Final Rule’s effective date. To qualify as a Senior Executive, the person must be earning more than $151,164 annually and be in a policy-making position. The person need not still be working at the company by the effective date of the Final Rule for the exception to apply. After the effective date of the Final Rule, this exception will no longer apply for any new noncompete agreements.
*Please note that this list is not exclusive, and specific definitions apply to each exception referenced.
D. The Final Rule could affect other employment agreements.
It is possible that the Final Rule will affect other employment agreements. The Final Rule defines a noncompete clause as:
a term or condition of employment that either prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (A) 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 (B) operating a business in the United States after the conclusion of the employment that includes the term or condition.[12]
Based on this broad definition, it is possible that any employment agreement that is overly broad in its language (e.g. non-solicit agreements, NDAs, confidentiality agreements, etc.) could be considered a noncompete agreement under the Final Rule. Legal counsel should be sought to ensure any agreement remains compliant and enforceable.
E. Current noncompete agreements and notice requirements for employers.
The Final Rule does not require rescission of existing noncompete agreements, but instead prohibits the enforcement of existing noncompete agreements after the effective date that do not fall under an exception. It further requires any person or entity who is party to an existing noncompete agreement with a worker to provide clear and conspicuous notice to the worker by the effective date identifying the employer and informing the worker that the non-compete will not be, and cannot legally be, enforced against the worker.[13] This notice can be delivered using a number of authorized methods to include hand delivery, e-mail or text message.
F. Conclusion.
While the Final Rule is currently pending, it is important for both employers and workers to review their existing labor contracts to understand their compatibility with this proposed change. For employers, this could mean re-drafting your employment contracts to include non-solicit or confidentiality agreements that are specific enough to remain compliant with the Final Rule but protect your business interests from unnecessary exposure and risk. Other options include utilizing fixed-term employment agreements, revisions to severance entitlements, and/or developing alternative retention methods. For workers, this could mean an opportunity to re-negotiate your employment contract for terms and conditions you personally value.
Regardless of your status as an employer or a worker, you are highly encouraged to consult with legal counsel to ensure you understand your rights and protect your business and/or yourself pending these proposed changes.
[1] Chamber of Commerce of the United States of America et al., vs. Federal Trade Commission et al., No. 6:24-cv-00148, USDC-EDTX.
[2] See 15 U.S.C.A. § 45.
[3] § 910.2(a)(1)(i) and § 910.2(a)(2)(i) (proposed).
[4] § 910.1(f) (proposed).
[5] Id.
[6] § 910.3(a) (proposed).
[7] § 910.3(b) (proposed).
[8] See 15 U.S.C. 45(a)(2).
[9] See 15 U.S.C. 44.
[10] See 15 U.S.C. 45(a)(2).
[11] See § 910.1 (proposed).
[12] Id.
[13] 3 § 910.2(b)(1) (proposed).
