Federal Trade Commission Proposed Rules Prohibit Non-Competes for All Workers
By Amy Kangas Alexander and Mathew L. Harrington | Related Practice: Employment
On April 23, 2024, the Federal Trade Commission voted to approve revolutionary regulations that will, if allowed to go into effect, effectively ban the use of non-competes in the United States (16 C.F.R. § 910.1-910.6). The following day, business groups filed multiple lawsuits arguing the FTC overstepped its authority. The suits were filed in two different Texas District Courts, and commentators predict the rules will be struck down or stayed at least within the jurisdiction of these courts. However, other federal District Courts may uphold the rules if the issue arises elsewhere.
Given this unsettled landscape, employers cannot ignore the proposed rules, which do exactly what they purport to do: ban the use of non-compete or similar provisions for all workers in the United States, with very few exceptions.
Scope of Ban
The rule is scheduled to go into effect on September 4, 2024. After that date, it would be an “unfair method of competition” for any company to enter any new non-compete. However, the rule is generally retroactive, meaning that most workers' existing non-competes will be unenforceable despite being written into an existing contract. The only exception to the retroactive ban is that existing non-competes with “senior executives” will remain enforceable, but going forward, not even senior executives will be able to enter into a new non-compete. (A “senior executive” is defined as an officer-level employee with “policy-making authority” who must earn at least $151,164 in the preceding year.)
The rule covers both independent contractors and employees.
The new rule also applies to provisions labeled as restrictions on non-solicitation, no-handling, no-business, training repayment agreements, confidentiality agreements, and no-hire provisions if those restrictions “prohibit,” “penalize,” or “function to prevent” a worker from seeking or accepting work with another employer. Such restrictions will be deemed a non-compete and, therefore, unenforceable.
Examples of de facto non-competes could include:
- A confidentiality agreement that prohibits disclosure of any information a worker learned during employment, regardless of whether it is general knowledge or publicly known.
- A training repayment agreement requiring an employee to pay a significant sum upon leaving employment.
- In certain circumstances, a prohibition on accepting business from customers (“no-business” or “no-handling”).
- In certain circumstances, a prohibition on recruiting or hiring employees (“no-hire,” “no-poach,” or “non-solicitation of employees”).
- Requirement to pay liquidated damages if an employee accepts work with another employer.
Exceptions to Ban
Exceptions to the rule purport to be extremely limited and include:
- The owner of a franchise in a franchisee-franchisor relationship.
- Restrictions pursuant to a bona fide sale of a business entity or an individual’s interest in a business entity.
- Industries not regulated by the FTC: non-profits, banks, savings and loans institutions, federal credit unions, state and local government, airlines and common carriers, and those subject to the Packers and Stockyards Act.
Notice Requirements
Employers must notify anyone subject to a non-compete that it is not enforceable before the effective date, preferably with model language provided by the FTC. Notice may be provided by mail, text, or hand-delivery. For ease of administration, employers may choose to notify all current and former employees (except senior executives) that any existing non-compete is unenforceable without an individualized determination of whether those employees have a valid non-compete.
FAQs:
- What if I have a dispute now? The rules do not apply to a cause of action accrued before the effective date, i.e., a lawsuit commenced before August 21 if the rule is not stayed. Generally, a breach of contract action accrues at the time of the breach.
- Will my employees sue? No, these rules do not appear to convey a private right of action to individual employees. Rather, the FTC is the sole enforcement authority.
- What’s the penalty? The FTC primarily enforces its regulations through orders to enjoin unfair methods of competition, such as after an administrative hearing or in a judicial proceeding. The FTC is very limited in its ability to seek monetary relief for violations of its regulations.
- What happens to Washington's non-compete law? Washington law will continue to apply in full before these rules become effective. Even after these rules become effective, the FTC imposes a floor, and does not displace more protective state laws. Elements of Washington’s non-compete statute ̶ such as notice requirements and penalties ̶ may survive even after these regulations go into effect.
- What should my company do now, in case the rules go into effect on August 21 despite court challenges?
o Prepare for the notice requirement. Audit your employment agreements and gather the contact information for current or former employees subject to a non-compete. Assess whether any of these individuals qualify for the “senior executive” exception. Monitor legal developments to determine if and when these notices must be sent.
o Review your restrictive covenants. Consider what restrictions your business truly needs, who needs to be restricted, and whether you should adopt a new strategy.
o Make sure your confidential information provisions track applicable law and do not prohibit disclosure of information that is not confidential. Excise overbroad elements of non-solicitation provisions.
o If new agreements are needed, be prepared to pay consideration to employees to sign those.
o Consult your legal counsel to confirm your approach and be ready for court rulings.
