So Long, Farewell, and Goodbye…to (Most) Noncompetes

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On May 7, 2024, the Federal Trade Commission (FTC) published a much-anticipated new rule that, once in effect, will prohibit ALL new noncompetes with employees nationwide, and enforcement of almost all existing noncompetes beginning September 4, 2024. The FTC rule covers all types of businesses in nearly all industries, but there are some that are outside the FTC’s jurisdiction and therefore not subject to the rule. This includes banks, savings and loan institutions, federal credit unions, common carriers, airlines, and most nonprofits.

Under the FTC rule, noncompetes are broadly defined to include any contractual commitments (often called “restrictive covenants”) that “prohibit a worker from, penalizes a worker for, or functions to prevent a worker from” either seeking or accepting work from a competitor after leaving employment or operating a competing business after leaving employment. The rule also mandates that notification be given to employees and former employees with an existing noncompete that is now unenforceable.

There has been significant uncertainty as to whether this rule is enforceable, with multiple lawsuits being filed across the country. But while some courts have issued injunctions stopping enforcement against the parties in those cases, at present those injunctions do not apply more broadly. The most recent court to have considered a request to issue a broad injunction recently denied that request.

Consequently, employers who currently use noncompetes must be prepared to comply with the FTC rule on and after September 4, including giving notice to employees by September 4.

Pre-Existing Noncompetes Enforceable Only for Senior Executives

The FTC rule includes only a very limited exception for certain “senior executives” with a noncompete executed before the rule becomes effective, but only if both of the following criteria are satisfied:

  1. They were paid the necessary minimum compensation. Initially, the minimum compensation is $151,164 in total annual compensation, subject to future increases for inflation. The term “annual compensation,” for purposes of determining if the exception has been satisfied and the noncompete’s enforcement is permissible, is based upon total compensation paid to the employee in the preceding year, unless the employee was not employed for that full year, in which case it is annualized based upon the amount earned in that preceding year. If the employee was not employed at all in the preceding calendar year, then it is based upon the annualized amount from the year prior to the year in which the employee’s employment ended.
  2. They were in a policy-making position. “Policy-making position” means “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.” The rule makes clear that this does not apply to a person with such authority over a subsidiary or affiliate of a common enterprise unless that person’s authority applies to the common enterprise as a whole.

Again, no other existing noncompete agreements can be enforced beginning September 4, 2024.

After September 4, 2024, employers are prohibited from entering into noncompete agreements with any employee, including senior executives.

Business Sale Exception

The FTC rule specifically carves out noncompetes entered into in conjunction with the bona fide sale of a business or ownership interest in a business. In that limited context, noncompetes may still be permissible.

Carveout of Other Restrictive Covenants

The FTC rule does NOT address, prohibit, or affect the enforceability of nondisclosure agreements, nonsolicitation agreements, or similar covenants with an employee, provided that the terms of those limitations are not written so broadly as to effectively “function” as a noncompete.

Required Notice to Employees/Former Employees

In addition to effectively voiding most existing noncompetes, the FTC rule also requires that employers with any existing noncompetes that are now prohibited provide the affected worker (that is, any current employees subject to a noncompete or any previous employees with a noncompete that is still otherwise in effect) with “clear and conspicuous notice to the worker” by the effective date of September 4, 2024, that the worker’s noncompete clause will not be, and cannot legally be, enforced against the worker. That notice must (a) identify the party that entered into the noncompete with the worker, AND (b) be sent either:

  • On paper by hand delivery or to the worker’s last known street address;
  • By email “at an email address belonging to the worker, including the worker’s current work email address or last known personal email address,” or
  • By text message at a mobile telephone number belonging to the worker.

There is an exception from the notice requirement only if the employer has no record of a street address, email address, or telephone number for the worker. A model notice was also published and can be found online here.

It is possible that at some time in the future, a court could declare the rule invalid or otherwise delay or enjoin enforcement of the rule on a nationwide basis. But it appears unlikely now that such an order will issue before September 4, 2024, so employers need to be ready.

Key Takeaways for Employers:

  1. Employers with any noncompetes in place as of now must be prepared to send the required notice by September 4, 2024, and MUST NOT take affirmative steps to enforce any unenforceable noncompete provisions after that date. Consult counsel to confirm any noncompetes that you are intending to enforce going forward to ensure the noncompete provision truly meets one of the limited exceptions before deciding not to send the notice, and to ensure that notices are done correctly. The FTC has also published a compliance guide here.
  2. As we noted previously, employers should consider using other types of agreements to protect their legitimate interests. Noncompetes are just one type of restrictive covenant that may be entered into with employees. Other types of agreements may offer some or all of the protections that an employer sought by using a noncompete, provided it is structured correctly. For example, nonsolicitation clauses can prevent departing employees from taking customers and other employees with them. Nondisclosure agreements can prevent employees from using or disclosing their employer’s trade secrets or other confidential information to, or on behalf of, third parties, including customer and contact information. Invention assignment agreements can ensure that employers own the rights to intellectual property the employees create and keep it away from competitors. These alternative agreements, or clauses, remain a viable option for most companies, if done correctly. Remember though, that any of these restrictions must also comply with applicable state law.
  3. Employers should create and maintain robust policies to protect proprietary information and address confidentiality obligations, and train employees consistently...and often. Comprehensive workplace policies are effective ways to buttress or even supplant post-employment contractual restrictions. In fact, most employers likely already have codes of conduct and confidentiality policies addressing how employees are to handle sensitive and proprietary information. Consider revisiting and updating those now to be sure they are as robust as needed for your particular business interests. And be sure to train all employees on the applicable policies, especially front-line managers who are likely to be the people enforcing these policies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

© Miller Nash LLP

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