Over the past year, you may have heard rumblings about a proposed ban on non-compete clauses in employment agreements.  The day has come: on April 23, 2024, the Federal Trade Commission (FTC) finalized its rule banning new non-compete clauses in all employment contracts.

The rule marks a significant policy shift under the FTC Act, 15 U.S.C. Sections 45 and 46(g), with aims to enhance market competition and employee mobility.  For the energy industry – which relies heavily on non-compete agreements – the rule may require immediate attention not only from a compliance standpoint but also to protect proprietary information and to retain talent.

The rule goes into effect 120 days after its publication in the Federal Register (the “Effective Date”), barring any legal challenges preventing its enactment.  Here is what you need to know.

Overview of the FTC’s Rule

The rule prohibits non-compete clauses for all workers after the Effective Date.  Specifically, the rule deems it an unfair method of competition to enter, enforce, or even suggest that non-compete clauses are enforceable post-implementation, with one narrow exception for senior executives with non-compete agreements entered into before the Effective Date.

Key Provisions

1. Immediate Ban on New Non-Competes: After the Effective Date, companies will be prohibited from entering into new non-compete agreements with all
2. Existing Non-Competes:
   • Senior Executives: Non-compete agreements in place before the Effective Date will remain enforceable for senior executives only.
   • Other Employees: For non-senior executive workers, existing non-compete agreements will become unenforceable.
3. Notice Requirement: The rule mandates that employers provide all current and former workers with notice about the non-enforcement of existing non-compete clauses. The rule itself provides model notice language to use to satisfy the notice obligation.

Like any other federal administrative rule, the devil is in the definitions and their application to specific circumstances.  Does the rule apply to your company?  What is “employment”?  Who is a “senior executive”?  What language rises to the level of a “non-compete clause”?

There are two definitions that you should be aware of.

• Definition of “employment”: The rule defines “employment” as “work for a person.”  A “person” means “any 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.”  The rule is broad and not limited to the classic “employee” in an “employee-employer” relationship under Federal and State labor laws.  It includes workers hired through third parties, like a staffing agency and independent contractors.
• Definition of “non-compete clause”: In the final rule, § 910.1 defines “non-compete clause” as
  1. 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.
  2. For the purposes of this part 910, term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

(Emphasis added)

In addition to express prohibitions on competition, language in your employment contracts that provides penalties when a worker accepts employment elsewhere, like liquidated damages or forfeiture of benefits or compensation, all fall under the scope of the definition of a non-complete clause for purposes of the rule.  Also, language that could broadly “function to prevent” seeking or accepting other work will not be allowed after the Effective Date.  In this regard, non-disclosure agreements (NDAs), training repayment agreement provisions (TRAPs), and non-solicitation agreements need to be reviewed and properly tailored to comply with the new rule.

Finally, the new rule is not applicable to non-compete agreements entered into by a person during the “bona fide sale of a business,” of the person’s ownership interest in a business entity or of all or substantially all of a business’s operating assets.

Implications and Recommendations

On the compliance front, engaging legal counsel to navigate and apply the new rule is advisable.  Existing agreements need to be audited, and standard agreements for future use will need to be revised with your business model, goals, specific employment practices, and infrastructure in mind.  The rule also applies to written or oral workplace policies, so employee handbooks and other less formal practices may need revision.

With non-compete clauses off limits to protect proprietary information, energy companies should bolster other legal means of achieving these goals.  Most non-compete agreements already have provisions for non-disclosure of trade secrets and other confidential information.  You may wish to enhance existing protections for use in future employment agreements.  If your standard contracts do not have non-disclosure language, you may want to add it or have your workers sign a separate Non-Disclosure Agreement.  Also, it may be time to update your company’s tech use and data security policies.

Non-compete agreements prevent talented employees from seeking work with the competition or starting a business that directly competes with their current employer.  When the rule goes into effect, companies should look to other means of retaining talent.  Happy workers typically do not seek employment elsewhere.

As of the writing of this article, various industry and business groups have already challenged[1] the new rule, and it is expected that more challenges will follow. Energy companies should monitor the litigation as it unfolds to ensure timely compliance with the rule if the Effective Date is not stayed pending the outcome of litigation.

[1] Ryan, LLC v. Federal Trade Commission, 3:24-cv-986, United States District Court for the Northern District of Texas, filed April 23, 2024; Chamber of Commerce for the United States of America et al. v. Federal Trade Commission et al., 6:24-cv-00148, United States District Court for the Eastern District of Texas, filed April 24, 2024; and ATS Tree Services, LLC v. Federal Trade Commission, et al., 2:24-cv-1743, United States District Court for the Eastern District of Pennsylvania, filed April 25, 2024.