On April 22, 2024, the Federal Trade Commission (FTC) issued a “Final Rule” proposing to ban non-compete agreements. This Rule, set to go into effect 120 days after it is published in the Federal Register, will render with limited exception, all existing non-compete agreements null and void. Moreover, the new Rule will abolish future non-compete agreements between employers and employees. This is an extremely impactful policy shift challenging the nature of the employment relationship and the ability of employers to protect their business, their proprietary interests, their confidential client information, and their most critical resource, their employees. Employers must take note of the proposed Rule, understand options for potential address and begin to take steps to protect their organizations.
Purpose of the Rule:
In short, the FTC Rule will make existing non-compete agreements unenforceable. The Rule mandates an employer notice requirement. All employers will be required to post a notice to all employees identifying that the employer will not enforce existing non-compete agreements. The FTC has provided model language for the required notice in the proposed Final Rule.
Reason for the Rule:
The FTC argues that non-compete agreements violate Section 5 of the Federal Trade Act as they constitute an “unfair method of competition.” The FTC suggests:
- Non-compete agreements are exploitive.
- They prevent employees from changing jobs and/or starting new businesses.
- The new Rule will drive higher earnings, as well as competition and innovation in the marketplace.
The FTC Rule is designed to protect the “fundamental freedoms” of workers.
Exception to the Rule:
Existing non-compete agreements between employers and “Senior Executives” remain in effect. Senior Executives are defined as individuals in a “policy-making position’ earning in excess of $151,164.00 per year. The Rule does prohibit negotiation of future non-compete agreements even with Senior Executives. To be clear, the exception for Senior Executives only applies to existing non-compete agreements. The FTC rule proposes to ban all future non-compete agreements.
The Rule does not apply to franchise agreements, although it does apply to non-compete agreements for franchise employees.
In addition, the Rule provides exception for non-compete agreements pertaining to owners and sale of businesses.
Action Steps for Employers:
We will keep you apprised of developments pertaining to the application and effective date of this Rule. In the interim, employers should consider the following steps:
1. Analyze the implications of the Final Rule on your business and existing agreements.
- Determine how many non-compete agreements are currently in effect.
- Examine how many apply to Senior Executives and what, if any, steps must be taken to protect business interests.
- Identify what risks and challenges will develop as a result of the Final Rule.
2. Consider, in concert with counsel, options for legal challenge to the Rule, internally as to enforceability of existing agreements and externally as to the legality of the Rule, as proposed.
Before the Rule goes into effect, legal challenge is anticipated by many pro-business organizations. This may extend the effective date of the Rule.
The U.S. Chamber of Commerce has already announced its intent to file suit challenging the legality of the Rule.
The Final Rule passed by a 3-2 margin. The dissenting Commissioners argued, in part, that only Congress can pass the Rule into law or give the FTC the authority to institute such a Rule. Neither has occurred in this instance.
Finally, the question remains, what rights and options exist for employers to enforce existing non-compete agreements before the Rule goes into effect?
3. Review alternate options for protection of proprietary interests, clients, and employees: One argument proffered by the FTC for the ban of non-compete agreements is that employers enjoy more appropriate and less restrictive options for specific address and protection of their business interests. Additional policy or documents designed to protect legitimate business interests include, but are not limited to:
- Customer Non-Solicitation Agreement.
- Employee Non-Solicitation Agreement.
- Confidentiality Agreement.
- Non-Disclosure Agreement.
Employers must work with learned counsel to redact and re-justify existing agreements and systemic protocols for protection of business interests.
There remains much to explore and unbundle pertaining to the FTC Final Rule to ban non-compete agreements. We will continue to monitor the development and confirmation of the proposed effective date and corresponding provisions of this Rule. It is necessary for employers to immediately engage counsel to evaluate the impact of this Rule and to coordinate a response to protect ongoing business interests, clients and employees. Please contact Jim Devine, Esq. at jfdevine@c-wlaw.com or 1-888-488-2638 with questions and concerns.
DISCLAIMER:
The information in this article is provided for general informational purposes only and may not reflect the current law in your jurisdiction. By reading this article, you understand that there is no attorney-client relationship between you and Cipriani & Werner, P.C., or any of our attorneys. No information contained in this article should be construed as legal advice from Cipriani & Werner, P.C. or the individual authors.