On April 23, 2024, the U.S. Federal Trade Commission (FTC) voted to ban noncompete clauses in employment contracts. This new rule will go into effect on September 4, 2024, 120 days after its publication in the Federal Register. While the language of the rule targets noncompete clauses specifically, other types of restrictive employment covenants may also be affected. The below provides an analysis of the rule and its implications for various individuals and entities to which the rule applies. It also outlines the three lawsuits that have already been filed to date challenging the rule.
First Things First, What Is the FTC?
The FTC is an independent agency of the U.S. government. The FTC’s website defines its mission as protecting the public from deceptive or unfair business practices and from unfair methods of competition. The FTC advances this mission through making and enforcing policy, such as the noncompete ban.
What Does the New Noncompete Rule Ban?
The rule, which can be found here, forbids people and businesses from (1) entering into or attempting to enter into a non-compete clause; (2) enforcing or attempting to enforce a non-compete clause; and (3) representing that a worker is subject to a non-compete clause. The rule applies prospectively and retroactively; i.e., it also bans noncompetes that were entered into before the rule was passed. However, senior executives—defined as workers in a “policy-making position” who earn more than $151,164 per year—are exempt from the retroactive application, so their existing noncompetes may remain in effect.
While the rule on its face seems to spare other types of restrictive employment covenants, including nondisclosure and nonsolicitation agreements, even those covenants may be implicated by the rule if they function as de facto noncompetes. This is because the rule broadly 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 seeking or accepting work or operating a business after the conclusion of employment. Thus, if a restrictive employment covenant has any of these effects, it will likely qualify as a noncompete under the rule, even if it is not labeled as such in a contract.
Who Does the Ban Apply To?
The ban applies to business entities—such as partnerships, corporations, associations, and other legal entities within the FTC’s jurisdiction, along with natural persons—including independent contractors, consultants, unpaid employees, externs, interns, volunteers, apprentices, and sole proprietors. In sum, both employers and workers are impacted by the ban. However, the ban appears focused on noncompetes in the employment context and does not appear to impact members of an operating agreement.
Are There Any Exceptions?
There are three exceptions explicitly provided for by the rule:
- Bona fide sales of business. There is a sale-of-business exception for noncompetes entered into in connection with a sale of a business;
- Existing causes of action. There is an exception for existing causes of action that accrue prior to September 4, 2024 related to noncompete clauses; and
- Good faith. There is a good faith exception for those who have a good-faith basis to believe that the rule is inapplicable.
Is Any Action Required?
Yes. If you are an employer, you must provide notice by September 4, 2024 to employees regarding existing agreements declared enforceable under the final rule. The rule provides model language for this purpose that operates as a safe harbor.
Is Anyone Challenging the Rule?
Yes. Since the rule was announced on April 23, there have already been three lawsuits filed challenging the rule itself along with the FTC’s authority to make the rule. The first lawsuit—Ryan, LLC v. Federal Trade Commission—was filed against the FTC in the Northern District of Texas. The second lawsuit—Chamber of Commerce of the United States of America, et al. v. Federal Trade Commission—was filed in the Eastern District of Texas. The third lawsuit—ATS Tree Services, LLC v. Federal Trade Commission, et al.—was filed in the Eastern District of Pennsylvania, potentially setting up a circuit split for Supreme Court review of the issue. All three of the lawsuits challenge the noncompete rule on similar grounds, including that the FTC lacked or exceeded its authority to issue the rule; the rule is an unconstitutional delegation of legislative power; and the rule is arbitrary and capricious.
Although the legal fate of the rule is uncertain, in the meantime, the FTC will likely continue to flex its enforcement muscle. As such, now is an opportune time for businesses to examine their employment agreements and consider modifying language that may be argued to constitute a noncompete provision under the rule. After all, other options exist for ensuring confidential information and trade secrets are protected.
If you would like help implementing changes to your company’s contracts given the new noncompete rule, please contact Ziliak Law’s Business and Corporate Practice.
Article by Julianne Dardanes