The effective date of the FTC’s Final Rule prohibiting non-compete agreements quickly approaches, yet there is still no definitive resolution as to whether it is constitutional. Nor has there been any preliminary injunction barring its enforcement on a nationwide basis. Thus, employers are in a quandary as to whether to notify their workers and former workers that they will be released from existing non-compete agreements as of September 4, 2024.

Overview of the FTC’s Final Rule

As we alerted you in our previous article, regarding legal developments that may negatively impact your policies and contracts that prohibit restricting competitive activities by your employees, the Federal Trade Commission (FTC) has issued a Final Rule banning almost all future non-compete agreements and retroactively prohibiting enforcement of most existing non-compete agreements

Exceptions to the Final Rule

The Federal Trade Commission (FTC) is a federal agency that enforces antitrust laws and promotes consumer protection. Earlier this year, the FTC issued a Final Rule that bans most noncompete agreements or policies with workers. The only exceptions are:

• A noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
• A claim related to a breach of a non-compete clause prior to the effective date of the Final Rule on September 4, 2024.

Scope and Impact of the Final Rule

A non-compete agreement can be written or oral and includes handbook provisions, policies, employment and severance agreements. This rule also prohibits terms and conditions so restrictive that they effectively prohibit a worker from obtaining a new job or starting a business. Thus, in certain situations, covenants preventing solicitation of customers may be included in the FTC ban. Generally, so long as they are reasonably drafted and not unduly overbroad, they are not likely to be prohibited by the Final Rule.

Note that the term “workers” encompasses all employees, independent contractors, interns, externs and volunteers. Therefore, except for the above exclusions, and for senior executives, as of that date, all non-compete agreements or policies are unlawful and unenforceable. Non-compete agreements with senior executives can remain in force after September 4, 2024 until their expiration. However, no new non-compete agreements can be initiated with such senior executives. A senior executive is defined as an employee who is in a policy-making position and received annual compensation of at least $151,164 during the preceding year.

Legal Challenges to the Final Rule

Although various groups have filed lawsuits to challenge the constitutionality of the Final Rule, none have yet effectively banned the Final Rule’s implementation nationwide. This issue will most likely be determined by the U.S. Supreme Court. In the meantime, the Final Rule will go into effect and preclude most non-compete agreements and policies as of September 4, 2024. Existing non-compete agreements are not cancelled, but they will be unenforceable.

Impact on State Law and Other Agreements

Note that state law protections of trade secrets are not impacted. However, confidentiality and non-disclosure agreements are generally permitted unless they are so broadly written and encompass such a large body of information that they function to prevent an employee from working for another employer in the same field or industry or starting a business. Similarly, restrictions against solicitation of customers and employees are generally still permitted and enforceable unless they function to prevent an employee from seeking or accepting other employment or starting a business of their own.

Employer Notification Requirements

The FTC Requires That Employers Notify Workers and Former Workers of this Final Rule On or Before September 4, 2024.

The Final Rule further requires all business entities to notify any workers or former workers, except for senior executives, on or before September 4, 2024 that any non-compete agreement or policy applicable to them will no longer be enforceable as of September 4, 2024. This notice must be clear and conspicuous and (i) be on paper delivered by hand to the employee or by mail to the employee’s last known address, (ii) emailed to an email address belonging to the employee, or (iii) sent by text message at mobile telephone number belonging to the employee. With respect to current workers, an all-staff email will suffice.

Penalty for Violation of the Final Rule

Notably, there is nothing in the language of the Final Rule imposing any penalty for a violation. Nor is it apparent that there is any monetary penalty associated with a failure to comply. Under the FTC Act generally, the FTC may initiate an administrative proceeding under section 5 for the purpose of seeking a cease and desist order against a party violating an FTC rule involving an unfair method of competition. Only if the employer would ignore the cease and desist order, would it be subject to a monetary penalty. Section 19 of the Act also provides a remedy for monetary damages but specifically references violations of consumer protection rules prohibiting unfair and deceptive practices.  It remains to be seen how the FTC will handle violations of the Final Rule.