UPDATE:  On July 3rd, 2024, a federal judge in Texas blocked the enforcement of the FTC rule banning noncompete agreements against a coalition of business groups, including the U.S. Chamber of Commerce. The judge indicated that the public can expect to see a final ruling in the case, which would presumably address the underlying authority of the FTC to issue this rule, by August 30 – before the rule is set to take effect. Other litigation in opposition to the FTC rule remains ongoing. Pohlman Law Group PLC will continue monitoring this issue and providing appropriate updates.

 

The Federal Trade Commission (FTC) issued a Final Rule banning non-compete agreements nationwide. Under the FTC’s new Rule, existing non-compete agreements for most workers will no longer be enforceable after the Rule’s effective date.

Unless stopped by a court, the Final Rule will become effective 120 days after publication in the Federal Register (the “effective date”).

As of this article’s publication, May 1st, 2024, the Final Rule has not been published in the Federal Register. 

Highlights

No New Non-competes

The Final Rule prohibits an employer from entering into, or attempting to enter into, a non-compete clause or agreement with a “worker” (including employees, independent contractors, and senior executives) or representing that a worker is subject to a non-compete clause after the Rule comes into effect. 16 C.F.R. § 910.2(a).

Duty to Inform Employees Currently Under Non-Competes

Employers must notify workers bound by an existing non-compete that the non-compete will not be enforced against them. The Final Rule requires an employer to provide clear and conspicuous notice to workers subject to a prohibited non-compete, in an individualized communication, that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker (16 C.F.R. § 910.2(b)(1)). The employer must provide notice by the Final Rule’s effective date by hand-delivery, by mail at the worker’s last known street address, by email, or by text message (16 C.F.R. § 910.2(b)(2)). The FTC included model language in the Final Rule that employers can use to communicate with workers.

Senior Executives

Existing non-compete agreements for senior executives (defined as workers earning more than $151,164 annually and employed in policy-making positions) can remain in force under the FTC’s Final Rule. The FTC estimates that fewer than 1% of workers qualify as “senior executives” under the Final Rule. After the effective date, employers are prohibited from entering any new non-compete, even if they involve senior executives.

Sale of a Business Entity

The Rule does not apply to non-competes signed as part of a bona fide sale of a business entity (16 C.F.R. § 910.3(a)).

Existing Litigation Over a Non-Compete

The Rule does not apply to causes of action that accrue before the effective date.

Industry Exceptions

There are industry-specific exceptions based on certain industries excepted from the Federal Trade Commission Act. Specifically, the Rule does not apply to non-profits, banks, savings and loan institutions, federal credit unions, common carriers, air carriers (including foreign air carriers), and persons and businesses subject to the Packers and Stockyards Act.

How Can I Protect My Business in the Future?

Virginia and many other states already disfavor and limit the enforceability of non-compete agreements. Employers have several existing alternatives to non-compete agreements that will enable firms to protect their business, investments, and trade secrets. The ban does not restrict non-disclosure agreements (NDAs), confidentiality agreements, customer non-solicitation agreements, client non-solicitation agreements, or employee non-solicit agreements. NDAs, Non-Solicitation agreements, intellectual property laws, and trade secret laws will continue to provide employers with well-established means to protect proprietary and other sensitive information and contacts. Note, however, that the Final Rule does ban these other forms of restrictive covenants (including NDAs and Non-Solicitation agreements) when they have the same functional effects as non-compete clauses (16 C.F.R. § 910.1).

Conclusion – What Should I Do Now?

Right now, employers should pay attention to this issue and wait to see whether the Rule is enjoined or if an effective date is established.

If an effective date is established, employers may wish to take several steps, including:

• Preparing to send notices to affected employees by compiling a list of current and former employees and relevant contact information
• Determining whether current or former employees qualify for the “senior executive” exception
• Evaluating whether any current “senior executives” should be asked to sign non-compete agreements before the Rule’s effective date

Do not send notices to employees at this time. Employers are advised to monitor the progress of the legal challenges and only act to send notices if the effective date is established and approaching.

Please contact Pohlman Law Group if you have any questions about the new final rule or its impact.