CLIENT ALERT – FTC FINAL RULE EFFECTIVELY BANNING NON-COMPETE AGREEMENTS

On April 23, 2024, the Federal Trade Commission, by a vote of 3-2, issued its final rule effectively
banning (with limited exceptions) non-compete agreements.

KEY POINTS

  • The effective date of the final rule is 120 days after publication in the Federal Register.
  • After the effective date, non-compete agreements with all workers are banned nationwide.
  • For non-compete agreements existing prior to the effective date, only non-competes with
  • “senior executives” may remain in force, while those with all other workers are not
  • enforceable after the effective date.
  • There is a sale-of-business exception for non-competes entered into in connection with the
  • sale of a business.
  • Employers must provide notice to employees regarding existing agreements deemed
  • unenforceable under the final rule.
  • The final rule will likely face legal challenges.

The Final Rule

What agreements are covered?

The rule defines a “non-compete clause” 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 such 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.

This broad prohibition covers agreements with any worker, including employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer. The rule applies to any person or employer, including a natural person, partnership, corporation, association, or other legal entity within the Commission’s jurisdiction, including any person acting under color or authority of state law, which effectively includes all persons or businesses operating for profit.

How about existing non-compete agreements?

Existing non-competes for all workers who do not qualify as “Senior Executives” are effectively banned. Under the final rule, it is an unfair method of competition: (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause (however, for Senior Executives, this restriction applies only as to a non-compete entered into on or after the effective date of the rule); or (iii) to represent that the worker is subject to a non- compete clause (unless the worker is a Senior Executive who entered into a non-compete clause before the effective date of the rule).

Employers are required to provide a “clear and conspicuous notice” to every worker (whose agreement is deemed unenforceable by the final rule) stating that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker, by the effective date. This notice must be in written form and delivered by hand, mail, email, or text message; the final rule provides model language for this notice.

Who qualifies as a “Senior Executive”?

As mentioned above, pre-existing non-competes with “Senior Executives” are not invalidated by the final rule. Whether any given employee falls within this category may be debated and litigated if legal challenges to the rule itself are not successful.

The rule defines “Senior Executive” as a worker (a) in a “policy-making position”; and (b) earning an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments).

A “policy-making position,” according to the final rule, is a business’ president, CEO or equivalent, or any other person with “policy-making authority” for the business similar to a corporate officer with policy-making authority. The term “policy-making authority” in turn means the authority to make policy decisions controlling “significant aspects of a business entity or common enterprise.”

Does the rule include other types of restrictive clauses, such as non-solicit agreements and confidentiality agreements?

The rule explains that a “non-compete clause” includes a “term or condition” of employment that “prohibits,” “penalizes” or “functions to prevent a worker from” seeking or accepting work after the end of the worker’s employment. Therefore, whether any given contractual provision constitutes a “non-compete clause” is a “fact-specific inquiry.” Again, this opens the door to litigation to flesh out this “fact-specific inquiry,” and what does and does not fall within the “non-compete clause” definition.

Are there other exceptions to the rule?

Non-compete clauses entered into with a seller of a business entity are exempt from the rule provided the sale involves the disposition of the person’s ownership interest in the business entity, or of all or substantially all of a business entity’s operating assets.In addition, the ban does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date,” meaning that the rule does not make current, ongoing litigation seeking to enforce a non-compete unlawful. The rule also includes a “good faith” exception providing that it is not an “unfair method of competition” to enforce or attempt to enforce a non- compete clause or to make representations about a non-compete clause where a person has a good- faith basis to believe that the non-compete ban is inapplicable.

What about state laws governing non-compete provisions?

The final rule “supersede[s]” all state laws, regulations, orders, and interpretations of such that are not consistent with the requirements discussed above. States could still impose requirements and restrictions with respect to non-compete clauses if they afford greater “protections” than those provided by the final rule.

What Should Employers Do Now?

Undoubtedly, the FTC’s final rule will be subject to legal challenge. By way of example, the U.S. Chamber of Commerce immediately plans to sue the FTC arguing, perhaps among other things, that the FTC lacks the legal authority to issue the rule. How long it will take for such legal challenges to be processed is unclear. Because the rule, if upheld, requires employers to provide notice to non-Senior Executive employees and former employees subject to non-compete clauses, employers may wish to plan how they intend to comply with that requirement.

Employers should also take a close look both at existing non-compete clauses and other contractual provisions that may arguably function as a non-compete under the rule, including non-disclosure and non-solicitation provisions. While the ultimate legal fate of the rule is uncertain, employers may wish to prepare for the possibility of the rule being enforceable but defer implementing any changes for as long as practicable until these challenges are resolved. Nonetheless, employers should continue to be strategic with their use of restrictive agreements and should confer with employment counsel to consider options to ensure adequate protection of their confidential information, trade secrets and goodwill.

Please contact Jody Maier, Esquire, Head of our Employment Law Group, to answer any questions you may have. Ms. Maier can be reached at (410) 321-4665.

DISCLAIMER: THE MATERIALS AND OPINIONS EXPRESSED IN THIS CLIENT ALERT ARE FOR INFORMATIONAL PURPOSES ONLY AND NOT FOR THE PURPOSE OF PROVIDING LEGAL ADVICE. THE READER IS DIRECTED TO CONTACT AN ATTORNEY TO OBTAIN SPECIFIC LEGAL ADVICE WITH RESPECT TO ANY PARTICULAR ISSUE THAT THEY MAY HAVE. USE OF THIS CLIENT ALERT DOES
NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP BETWEEN LEVIN GANN, PA, AND THE READER. THE OPINIONS EXPRESSED IN THIS CLIENT ALERT ARE THE OPINIONS OF THE INDIVIDUAL AUTHOR AND MAY NOT REFLECT THE OPINIONS OF THE FIRM OR ANY INDIVIDUAL ATTORNEY