The FTC votes to ban most Non-Compete Agreements – significant legal challenges expected

BlogLine

The FTC votes to ban most Non-Compete Agreements – significant legal challenges expected

4/24/24

During an open meeting on Tuesday, April 23, 2024, the Federal Trade Commission voted 3-2 to approve a Final Rule banning non-compete agreements nationwide. The Final Rule will take effect 120 days after its publication in the Federal Register.

The Rule makes entering into non-competes with workers an unfair method of competition, and thus a violation of Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45). The Final Rule largely tracks the initial Proposed Rule. Fundamental elements of the Final Rule include:

Entering into new post-employment non-competes, including with senior executives, is prohibited after the effective date;

Existing non-competes with senior executives may remain effective. Under the Rule, “senior executive” is defined as an employee who is in a “policy-making position” earning more than $151,164 annually;

Other existing non-competes will be void as of the effective date. While formal recission of existing non-compete agreements is not mandated, the Rule requires that employers give current and former employees notice that existing non-competes are no longer enforceable;

The definition of “non-compete” does not include restrictions on competition during employment with the employer;

Non-solicitation provisions do not appear to be impacted by the Rule;

An exception applies to situations involving non-competes entered into in connection with the sale of a business.

The FTC enforces a variety of consumer protection laws affecting virtually every area of commerce, with some exceptions concerning banks, insurance companies, non-profits, transportation and communications common carriers, air carriers, and some other entities. The Final Rule applies to entities subject to the FTC Act.

Many question whether the Commission has the authority to unilaterally ban non-compete agreements, including the two dissenting Commissioners from yesterday’s vote. It is expected that the U.S. Chamber of Commerce will file a lawsuit this week challenging the FTC’s Rule, seeking a restraining order and emergency injunction. A wave of additional lawsuits challenging the Rule will almost certainly follow. It is possible that the Rule’s implementation date will be delayed pending resolution of the anticipated legal challenges.

So, what should employers do? While the future of non-compete agreements remains uncertain, employers with non-compete agreements in place should work with outside counsel to look at non-compete clauses and other contractual provisions that may be considered to function as a non-compete provision under the regulation, such as non-disclosure, non-solicitation, and provisions requiring employees to reimburse employers for certain training expenses if they leave their employment prior to a certain period of time. Some companies will likely choose to take a wait and see approach, given that the anticipated legal challenges to the rule could result in a stay of its effective date. Another option is to prepare as though the rule will become effective in 120 days by rewriting applicable contracts to remove non-compete clauses, while retaining but narrowly tailoring non-disclosure and non-solicitation provisions. Finally, some employers may choose to occupy the middle ground, and retain only non-compete agreements for high level executives and other key personnel. There are risks and benefits to each approach, and your FMG attorneys are available to discuss the pros and cons and in deciding which approach best suits your company’s business interests moving forward.

For more information, please contact your local FMG attorney.

Save Print