The Federal Trade Commission (“FTC” or “Commission”) recently issued a final rule banning non-competes throughout the United States.[1] Many employers and stakeholders in U.S. businesses may initially balk at this news. Training new employees often involves disclosing information containing trade secrets to these employees – valuable information that could be utilized to start a competing business or improve a competitor’s operation. Further, when purchasing a business, including non-competes is paramount to prevent the seller from starting a venture competing with the business that was just sold. This article discusses the ban, the effect on existing non-competes and alternative means of protection available to employers and business owners.

Non-competes and the rule

A non-compete is a provision that restricts a party from engaging in activities that compete with those of the other party and is typically limited in scope, duration, and geography. Non-compete provisions are commonly used in employment, acquisition, and joint venture agreements.

In the final rule,[2] the Commission held that it is an unfair method of competition, and therefore a violation of Section 5 of the Federal Trade Commission Act, for employers to enter or attempt to enter into non-competes with workers, to enforce or attempt to enforce non-competes or to represent that a worker is subject to a non-compete clause. Under the FTCA, a non-compete clause is a term or condition of employment prohibiting a worker from, penalizing a worker for or functioning to prevent a worker from either seeking or accepting work in the US with a different person after the employment relationship ends or operating a business in the US after the employment relationship ends. Workers include, among others, employees, independent contractors, externs, interns, volunteers and apprentices. The rule applies to oral and written non-competes and whether these form a contractual term or workplace policy. It is to become law on September 4, 2024, unless delayed or thwarted by legal challenges.

Importantly, the final rule does not apply to non-competes entered into in connection with a bona fide sale of business. As such, non-competes may continue to be used in M&A and private equity transactions. The sale of business exemption is qualified, as the underlying transaction must be a “bona fide sale”, i.e. an arm’s length sale between two independent parties, in which the seller has a reasonable opportunity to negotiate the terms of the sale – which is the case for the large majority of transactions in which non-competes are required from the selling parties.

In addition to the sale of business exemption, the rule’s retroactive effect is limited, as it does not apply to causes of action regarding an existing non-compete that arose before the rule’s effective date. Further, the rule does not apply to certain industries, including certain nonprofits, banks, savings and loan institutions, among others.

Effect on existing non-competes

The final rule differentiates between senior executives and other workers regarding non-competes used in the employment context before the rule’s effective date. For senior executives, existing non-competes remain in force, while existing non-competes with other workers are unenforceable after the effective date. However, after the rule’s effective date, employers cannot enter into new non-competes with senior executives. Additionally, by the rule’s effective date, covered entities must notify workers who are parties to a non-compete agreement that the rule prohibits the non-compete, which cannot and will not be enforced.

Alternatives to non-competes

Notwithstanding the ban, several tools still remain available to protect employers, their proprietary information and their investment in employees. First and foremost, proprietary information essential to the employer’s business may be protected by utilizing intellectual property protection strategies, such as obtaining patents, registering copyrights, execution of IP assignment agreements and implementing trade secret protection measures. Protecting trade secrets may include an audit of company trade secrets, the implementation of a written trade secret protection policy, the education of employees and monitoring their compliance with the policy. As part of their trade secret protection strategy, employers can still use non-solicits and other restrictive covenants unless they effectively prevent a person from seeking or obtaining other employment. In particular, agreements with employees should include non-disclosure, conflict of interest, invention assignment, notice, and return of property provisions to strengthen an employer’s trade secret protection measures. Further, confidentiality policies and agreements may still be used to protect proprietary information. These agreements may not be so overbroad to effectively amount to a non-compete provision.

Fixed-term employment contracts are another tool employers may use to protect their trade secrets and investment in employee development and training. If an employee with a fixed-term employment agreement leaves to work for a competitor before the end of the contract term, the former employer can sue the departing employee for damages arising from the contract breach. Employers also retain the ability to impose restraints on workers’ activities during the employment term as the non-compete ban only applies to post-employment restraints. Further, using “garden leave” clauses generally remains permissible. The worker remains employed and is paid, but can be relieved of some or all of their duties during a specified period. If the final rule becomes law, it is unlikely that injunctive relief will be granted, as this would render the garden leave the functional equivalent of a non-compete. Nonetheless, an employer could still sue the worker for breach of contract for violating the garden leave clause and potentially sue the hiring employer for tortious interference.

The FTC has published FAQs to help employers navigate the rule’s scope of coverage, prohibitions, requirements, and exceptions (see here). While the final rule is not yet law, employers should review and determine the company’s approach to compliance before the effective date, review existing non-compete agreements as well as plans and policies containing restrictive covenants, consider entering into garden leave agreements with key executive employees, review and develop intellectual property protection be prepared for continued regulation of restrictive covenants and keep an eye on state laws.

[1] Federal Trade Commission, FTC Announces Rule Banning Noncompetes, ftc.gov (Apr. 23, 2024),https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.

[2] FTC Non-Compete Clause Rule, 16 C.F.R. §§ 910.1 to 910.6 (2024).