The New Rule Banning Most Non-Compete Clauses
The U.S. Federal Trade Commission ("FTC") voted on April 23, 2024, 3-2 along party lines, to approve a final rule banning non-compete clauses for all workers, with limited exceptions (the "Rule"). As expected, business groups immediately took action to block its implementation. A day after the Rule was approved and before most business owners and employees even had time to determine the impact of the new Rule, the U.S. Chamber of Commerce ("Chamber") filed suit in the Eastern District of Texas asking for an order setting it aside. Shortly thereafter, the Chamber also intervened in a separate lawsuit filed by a private business, moving to stay the effective date of the Rule and for a preliminary injunction preventing it from taking effect. Employers will need to await the outcome of these challenges, and any appeals thereof, to determine whether the Rule will be enforced.
The final Rule largely tracks the FTC's draft proposal from last year. It invalidates nearly all non-compete clauses for employees, volunteers, and independent contractors alike, both going forward and retrospectively. Like California's recent law (Valentine's Day Deadline for California Employers to Notify Employees that Existing NonCompete Provisions are Void. – Meister Seelig & Fein) the Rule contains a notice provision requiring employers to let anyone subject to such a clause know that it is no longer effective, including former employees.
Some notable exceptions include that non-competes are permitted in relation to the bona fide sale of a business, in order to protect the buyer from competition from the seller, and that existing non-competes can continue to be enforced for "senior executives," i.e., those who are paid more than $151,164 per year and who hold a "policymaking position." However, no new non-competes can be included in any agreements with such employees from now on.
Recommendations for Employers
For now, the Rule is not yet effective. Assuming it survives legal challenges without modification, it will go into effect 120 days after its publication in the Federal Register.
Even if the FTC's Rule is ultimately struck down by the courts, many states have their own laws governing the use of non-competes. Therefore, while legal challenges to the Rule are pending, employers should review any existing non-compete clauses to ensure that they comply with applicable state law, based on the location where any given employee or independent contractor works (not necessarily where the employer is located). In addition, employers should consider identifying current and former employees that have non-competes (that are still in effect) and begin collecting information about how to contact them in the event that they must be notified that such agreements are void.
In light of the growing movement against non-competes, employers may consider alternatives, such as nondisclosure provisions, non-solicitation clauses, or properly crafted garden leave provisions, all of which can also help companies protect their competitive edge, confidential information, and business relationships.
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