Highlights:
- Within 120 Days of Publication, the Final Rule Will Ban Most Non-Compete Agreements.
- Employers Must Not Include New Non-Compete Agreements in Agreements With Employees.
- Employers Must Notify Current Employees With Non-Compete Agreements That Such Agreements Will Not Be Enforced.
- Exceptions Include: Existing Non-Competes of Senior Executives and if They Are Part of a Sale of a Business Entity.
The New FTC Final Rule Bans Most Non-Compete Clauses, With Limited Exceptions:
On Tuesday, April 23, 2024, the Federal Trade Commission (FTC) promulgated a final rule banning most non-compete agreements, in any industry, and is set to become effective 120 days after its publication in the Federal Register (the “Final Rule”). The Final Rule defines a “non-compete clause” as any contractual term or condition, whether written or oral, that prevents an employee from seeking or accepting employment with a different employer, or running their own business, in the United States, after the conclusion of their current employment. The scope of new employment in a related field or geographical area are not factors.
Once in effect, employers may no longer enter into, enforce, or attempt to enter into or enforce existing non-compete clauses with workers from the Final Rule’s effective date forward. Under the Final Rule, employers must ensure there are no new non-compete clauses included in contracts with new hires, as such provisions will be categorically banned across all sectors of employment, with limited exceptions. Moreover, the Final Rule requires employers to clearly and conspicuously notify employees with existing and prohibited non-compete agreements that such agreements will not and cannot be enforced. Restrictions prohibiting workers from competing during the term of their employment remain permissible and enforceable.
Exceptions Under the Final Rule:
The Final Rule provides that existing non-compete agreements of senior executives can remain in place and are enforceable. Generally, “senior executives” are highly compensated individuals with enterprise-wide decision-making authority. This limited exception will still prohibit employers from entering into or enforcing new non-compete agreements with senior executives, in line with the same comprehensive ban for all other workers on new agreements.
With respect to the other limited exceptions, non-compete clauses are permissible if they are part of a sale of a business entity. According to this exception, non-compete clauses are allowed if they are entered into by a person pursuant to a bona fide sale of a business entity, the person’s ownership interest in a business entity, or of all, or substantially all, of a business entity’s operating assets.
Q&A for Employers:
Q1: Are there ramifications for employers if they do not comply with the Final Rule?
A1: Actions that do not comply with the FTC’s Final Rule may be considered an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act, and such violations can lead to fines, penalties, and injunctive relief. Moreover, non-compliance could also damage reputational standing and employee relations, potentially impacting a provider’s ability to recruit and retain talent.
Q2: How does the Final Rule interact with state laws on non-compete agreements?
A2: The Final Rule preempts state law that permits restrictive covenants prohibited by the Final Rule. Providers must be aware of both federal and state regulations.
Q3: Can employers require employees to sign non-disclosure agreements (“NDAs”) and/or prohibit solicitation of clients/patients?
A3: It depends. The breadth of the prohibition on non-competes could cover NDAs or non-solicitation agreements if they effectively prevent the employee from working.
Q4: What should employers do if they believe an existing or proposed non-compete clause is justified under the Final Rule?
A4: The Final Rule provides protection for employers who enter into non-compete arrangements it believes, in good faith, comply with the law. Employers should consult with legal counsel to analyze the specifics of their agreement. If there is a good faith belief that an exception applies (such as for senior executives or in the context of a bona fide business sale), employers may potentially utilize the exceptions to continue to enforce or propose such non-compete clauses.
Q5: Is the Final Rule within the FTC’s authority?
A5: The FTC provides various reasons it believes the Final Rule is valid and enforceable. However, the Final Rule is already facing legal challenges, including a lawsuit filed by the U.S. Chamber of Commerce, and may never become effective in its present form. Regardless, both employers and employees who may be impacted should understand the key provisions of the Final Rule and not assume it will be successfully challenged. It is unclear as to whether the Final Rule applies to non-profit organizations; however, the FTC’s commentary suggests it would apply to non-profits. This is another area likely to be challenged in court.
Next Steps for Employers (Assuming the Final Rule Becomes Effective in Four Months):
- Stay Updated: Follow Garfunkel Wild for updates and challenges to the FTC’s Final Rule. We expect that there will be several challenges to the Final Rule, which may delay the effective date and/or may stay enforcement.
- Cease Enforcement: Upon the effective date, stop enforcement of any non-compete clauses that do not fall under the exceptions.
- Notify Employees: Upon the effective date, notify all affected workers in a clear and conspicuous manner that existing non-compete agreements will not be enforced. The FTC provides model language that can help with these notifications, and there are specific requirements for compliance.
- Adjust New Contracts: Upon the effective date, ensure that new employment contracts do not contain non-compete clauses unless they meet the specific exceptions.
A copy of the Final Rule is available at https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf. Garfunkel Wild is available to assist with any questions related to existing and future agreements.
Should you have any questions regarding the above, please contact the authors, the Garfunkel Wild attorney with whom you regularly work, or contact us at [email protected].