NEWS

The FTC Bans Non-Competition Agreements

April 25, 2024 – On April 23, 2024, the Federal Trade Commission issued its far-reaching final rule which effectively bans all post-employment non-competition agreements between employers and employees on a nationwide basis. The final rule, the product of a 3-2 vote by the Commission, concludes that non-competition agreements are an unfair method of competition, in violation of the Federal Trade Commission Act. The key takeaways of the final rule are outlined below:

Prohibitions

  • The final rule bans existing non-competition agreements with workers other than senior executives (narrowly defined as those whose hold a policy-making position and receive total annual compensation of at least $151,164).
  • The final rule bans new non-competition agreements with all workers (including senior executives) on or after the final rule’s effective date, which is 120 days after publication in the Federal Register. 

 

Exceptions

  • Existing non-competition agreements with senior executives, which are defined very narrowly.
  • Non-competition agreements that stem from a “bona fide” sale of a business entity, i.e., a good faith, arm’s length transaction between two independent parties with reasonable opportunity to negotiate the sale terms.
  • Restrictions on what a worker may do during her/his current, as opposed to future, employment.
  • Actionable legal claims regarding a non-compete clause that arose before the effective date.
  • Enforcement or attempted enforcement of a non-compete clause, or representations related to it, where a person has a “good faith” basis to believe the non-compete restrictions do not apply.

 

Relevant Definitions

Non-Compete Clause: “[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 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
  • operating a business in the United States after the conclusion of the employment that includes the term or condition.” (emphasis added)

 

Worker: “[A] natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.” 

What This Means For Employers

Other Restrictive Covenants May be Prohibited: The definition of a non-compete clause is decidedly broad—given that it includes “functional” contractual provisions—and it applies not just to employees, but to contractors as well. The following restrictive contractual provisions may now also be unenforceable:

  • Non-solicitation clauses (if they can be construed as preventing a worker from “seeking or accepting employment”).
  • Broadly written non-disclosure agreements that effectively preclude the worker from working in the same field post-employment.
  • Training repayment agreements when the required payment is not reasonably related to the costs the employer incurred to train the worker.

 

Whether a given clause is a “functional” non-compete will be a fact-specific inquiry, depending on the circumstances of the covenant and the “surrounding market context.”

Notification of Unenforceable Non-Competition Agreements Required: For existing non-competition agreements with workers other than senior executives, which are no longer enforceable after the effective date, employers must notify workers that their non-competes cannot be legally enforced against them. Such notice must be delivered to the worker via one of the following means:

  • On paper by hand;
  • By mail at the worker’s last known personal street address;
  • Via email to an address belonging to the worker (including the worker’s current work email address or last known personal email address); or
  • Text message to the worker’s mobile phone.

 

The FTC has provided model language for employers to use in their notices, which specifically states that the new rule “does not affect any other terms of conditions of [the worker’s] employment.” Employers who use the model language, and comply with the proper delivery methods outlined above, will be entitled to safe harbor.

The new rule has sweeping implications for employers who rely heavily on the safeguards of non-competition agreements to protect legitimate business interests, including trade secrets and confidential information. The FTC has made clear that non-competition agreements will largely be unenforceable as of the final rule’s effective date, and existing restrictive covenants will be subject to scrutiny. Moving forward, employers must carefully draft future clauses to ensure that they cannot be construed as the now-prohibited “functional” non-competes. As of the date of this publication, two lawsuits are currently pending, one filed by the U.S. Chamber of Commerce in the Eastern District of Texas, Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce v. Federal Trade Commission and Lina Khan, in her official capacity, Case No. 6:24-cv-00148, and the other filed by Dallas-based global tax services and software provider Ryan, LLC in the Northern District of Texas, Ryan, LLC v. Federal Trade Commission, Case No. 3:24-cv-986. Both seek an order from the Court setting aside the rule in its entirety, and the U.S. Chamber of Commerce is also pursuing a permanent injunction preventing its enforcement.

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