On Tuesday, April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning nearly all non-compete agreements effective 120 days from the rule’s formal publication. The move, or something like it, has been expected for nearly three years following an Executive Order issued by President Biden in July 2021 (see July 15, 2021 Alert). However, it’s uncertain that the final rule will go into effect, as industry groups are already challenging it, including in a lawsuit filed yesterday by the U.S. Chamber of Commerce and other groups in a Texas federal court. Even so, businesses would be wise to look at alternatives to non-competes to protect their interests.
If the final rule becomes effective, it would ban all post-employment non-compete clauses with the exception of those already existing that apply to “senior executives”—defined as chief executive officers, presidents, or other workers with “policy-making authority” who make at least $151,164 per year. That means that as of the effective date (likely to be in August absent court action), employers may not enter into, enforce, or attempt to enter into or enforce non-competes with any worker. Employers also may not represent to any worker other than senior executives with already existing non-competes that the worker is subject to such restrictions. Such activity is deemed by the rule to be an unfair method of competition.
The definition of “worker” includes independent contractors as well as employees. The definition of “non-compete clause” includes agreements that prevent workers from seeking or accepting work or operating a business as well as any agreement that penalizes such activity.
By the effective date, whenever that may be, employers are required to deliver “clear and conspicuous” individualized notices to any workers, including former employees, whose non-compete agreements are no longer effective. Notices may be delivered by hand, mail, email, or text message. A model notice is included in the final rule.
The FTC issued this rule under provisions of the Federal Trade Commission Act that authorize it to regulate unfair methods of competition affecting interstate commerce. As noted earlier, however, the final rule and the FTC’s interpretation of its authority are facing opposition in court; in addition to the U.S. Chamber of Commerce lawsuit, which is seeking declaratory and injunctive relief including an order vacating and setting aside the final rule in its entirety, there are news reports of at least one suit filed on Wednesday in a different Texas court. Other business and industry organizations will surely follow, leaving in question whether the rule will go into effect on the FTC’s timeline, if ever.
While the effective and potential implementation dates of this ban are in question, the trend against non-competes is clear. So is the significant impact of such a ban for both workers and employers. The FTC estimates that at least one in five—perhaps more than 30 million—American workers are currently subject to a non-compete.
The Biden administration has been working to restrict or eliminate non-competes for years, between the Executive Order, the FTC’s rulemaking process, and last year’s opinion issued by the General Counsel of the National Labor Relations Board (see June 1, 2023 Alert). States such as California, Washington, Texas, and Massachusetts have had laws in place restricting or prohibiting non-competes for years. The legislatures of other states, including Connecticut and New Jersey, have repeatedly considered and advanced, but not yet passed, significant statutory restrictions on non-competes.
Accordingly, whether the FTC’s new rule is ever implemented, employers should take this opportunity to review the restrictive covenants currently in effect with workers and to explore alternatives to non-compete agreements, such as non-solicitation and non-disclosure agreements, to protect their confidential information and their client relationships, and to promote retention of good employees.
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