FTC TAKES ACTION AGAINST NONCOMPETES – DOES IT IMPACT YOU?

Noncompete agreements are about to become a thing of the past for the vast majority of employees.

In April, the Federal Trade Commission (FTC) issued a final rule banning noncompetes nationwide – subject to limited exceptions. The FTC determined such provisions and agreements are an unfair method of competition; therefore, employers’ entering into or enforcement of noncompetes will violate Section 5 of the FTC Act.

It wasn’t much of a surprise. The FTC issued a proposed rule back in January of this year that garnered overwhelming support. During the 90-day public comment period, the FTC reported it received more than 26,000 comments on the proposed rule, with over 25,000 comments in support of the ban.

Under the FTC’s new rule, existing noncompetes for most workers will no longer be enforceable after the rule’s effective date. Also, employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

What is a Noncompete?

The FTC’s final rule provides an expansive approach and defines a noncompete as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

How Can Company Still Protect Themselves?

Employers have several alternatives to noncompetes that will still enable companies to protect their sensitive information such as agreements containing protective covenants regarding confidential information, intellectual property, trade secrets and proprietary information – each of which is still permissible without having to enforce a noncompete. Trade secret laws, non-solicit agreements and non-disclosure agreements (NDAs) all provide employers with well-established means of protecting proprietary and other sensitive information. The FTC reported that its researchers estimate that over 95% of workers with a noncompete already have an NDA. Note, however, that interpretations of such covenants that, while technically permissible, actually constitute an impermissible noncompete are expected to rise; therefore, existing covenants will be subject to additional legal prohibitions and challenges. Additional attention must be given to existing company documentation.

Exception to the Ban:

• Existing noncompetes for senior executives (who represent less than 0.75% of workers) can remain in force.
  • Employers, however, are prohibited from entering or enforcing new noncompetes with senior executives.
  • The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.
• Bona Fide Sale of Business
  • The bona fide sale of a business is the only complete exception to the final rule. Thus, any noncompete clause entered into by a person pursuant to the sale of their business or the person’s ownership interest in the business will still be enforceable and new agreements will be able to be entered into in this context after the effective date.
• Contracts between franchisors and franchisees (but not their employees).

Challenge to the Rule:

Many legal challenges to the final rule are likely, which, at the very minimum, will significantly delay the implementation of the rule. Indeed, the U.S. Chamber of Commerce has already challenged the final rule in the U.S. District Court for the Eastern District of Texas. This leaves legal observers predicting that there is a strong likelihood that either this challenge or one of the other cases filed will result in a temporary injunction preventing the final rule from going into effect as scheduled.

What Happens Next?

Subject to court injunction, the final rule will become effective 120 days after publication in the Federal Register – which is likely to occur in a couple of weeks. Therefore, the ultimate effectiveness of the rule is projected to occur during August 2024.

Once the rule is effective, market participants can report information about a suspected violation of the rule to the Bureau of Competition of the FTC.