THE FEDERAL TRADE COMMISSION NON-COMPETE BAN: NOW WHAT?

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Michael J. Fortunato

May 6, 2024

In 1914, Congress passed the Federal Trade Commission (FTC) Act.  Section 5 of the Act made “unfair methods of competition” in interstate commerce unlawful.  110 years and 570 pages of explanation later, the FTC has decided that, for workers other than some current senior executives, “non-competes” are unlawful.  “[I]t is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause.”  See FTC April 23, 2024 press release here.  The final rule imposes a comprehensive ban on new non-competes for all workers, including senior executives.

The day after the FTC published the final rule, which is scheduled to go into effect by the end of August, the U.S. Chamber of Commerce filed a lawsuit challenging the FTC’s nationwide ban on non-competes.  Several private companies also have filed lawsuits, including a tree service in Pennsylvania and a global tax service based in Texas.  Regardless of whether the FTC ban survives a judicial review, similar restrictions are occurring at the state level.  Here is what you need to know.

What does the rule say?
Essentially, existing non-competes for the vast majority of workers will no longer be enforceable.  Specifically, the final rule provides that it is an unfair method of competition (and therefore a violation of Section 5 of the FTC Act) for employers to enter into non-competes with workers after the rule’s effective date.

Does it apply to me?
The final rule applies to employers subject to FTC oversight.

The final rule defines “non-compete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

“Worker” is defined in the final rule as those who work or worked on a paid or unpaid basis.  “Worker” includes employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors.

Non-competes between franchisors and franchisees are exempted.

The final rule allows non-competes between the buyer and seller of a business.

The final rule allows companies to maintain existing non-competes with senior executives.  The final rule defines “senior executives” as those workers earning more than $151,164 annually in policy-making positions.  Those in “policy-making positions” include a company’s president and chief executive officer, among others.

The final rule does not apply to a cause of action on a non-compete that accrues prior to the rule’s effective date.

If state law is more restrictive of non-competes than the FTC’s rule, state law will apply.

So what do we do now?
Work with legal counsel.

Designate someone to speak on behalf of your company (inside and out) about the FTC’s rule and its impact on your company.

Think about notice.  What?  For workers with existing non-competes that violate the final rule, you must notify them that you will not enforce the non-compete in the future.  The FTC’s final rule includes model language that employers may use to communicate that information to workers.

Audit your agreements and policies.  Look, not just at your employment agreements with workers, but also at your compensation and benefits plans for clauses that may be deemed to penalize workers for competition.  Now is the time to inventory your legacy plan documents for post-employment restrictions.

Continue to enter into and enforce narrowly-tailored non-solicitation agreements or non-disclosure agreements.

Consider implementing garden leave or notice requirements.  Garden leave is a designated period after an employee resigns or is terminated wherein the employee maintains their employment status and pay but refrains from attending work.  Literally “go sit in the garden” for 30, 60, or 90 days.  Garden leave provides meaningful artificial separation between the departing employee, your customers, your employees, and your confidential information.  Mandating a substantial notice of departure period can accomplish the same goals.

Look to trade secret laws to protect proprietary and other sensitive information.

Disclose proprietary and other sensitive information only to those who need to know.

Consider requiring current senior executives to sign a reasonable non-compete in the next 120 days.  Those agreements will still be enforceable subject to state laws in places like California, North Dakota, Oklahoma, and Minnesota.

Though it may be easier said than done, the FTC recommends that, rather than using a non-compete, employers who wish to retain workers should compete on the merits for their services by improving wages and working conditions.

This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice.  Always consult an attorney with specific legal issues.