In my May 2023 column in Industrial Distribution, Requiem For Non-Competes?, I detailed the U.S. Federal Trade Commission's (FTC) proposed rule that would effectively ban most, but not all, non-compete agreements, warning that businesses needed to be ready for a post-non-compete world.
What was once merely proposed is now final, with the FTC's recent approval of a Final Rule essentially prohibiting all such provisions except for those involving "senior executives" or related to the sale of a business.
The Final Rule differs in not insignificant ways from the proposed rule and, short of judicial intervention, will become effective 120 days after its publication in the Federal Register (likely in August 2024). The Final Rule only furthers the continuing erosion of non-compete agreements, both statutorily and judicially. Within hours of its approval, the rule became the subject of litigation, with the U.S. Chamber of Commerce and others filing a federal lawsuit challenging the rule's validity.
Accordingly, business owners who have relied upon non-competes to protect their trade secrets, confidential information, or other business interests need to understand the implications and scope of the Final Rule with the expectation that it will govern these agreements going forward. The following are the key provisions of the Final Rule that business owners need to know.
Definition of Non-Compete Clause
Under the Final Rule, a prohibited "non-compete clause" is any "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.
For purposes of the Final Rule, "term or condition of employment" includes, but is not limited to, a contractual term or workplace policy, whether written or oral. The net the FTC seeks to cast to eliminate non-compete agreements is expansive.
Attempted Workarounds Will Be Scrutinized
The Final Rule does not prohibit non-disclosure or non-solicitation agreements. However, if any such agreement effectively "prohibits," "penalizes," or "functions to prevent a worker from" seeking or accepting work after the end of their employment, it may be deemed to be a prohibited non-compete. The FTC states that whether any given provision constitutes a "non-compete clause" is a "fact-specific inquiry."
All Workers Other Than "Senior Executives" Are Covered By The Non-Compete Ban
Other than "senior executives" (discussed below), the Final Rule prohibits all non-competes for employees, independent contractors, externs, interns, volunteers, apprentices, sole proprietors who- provide a service to a person, and a person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.
"Senior Executives" And Non-Competes Related To The Sale of a Business Excluded From The Ban
One significant difference between the proposed rule and the Final Rule is that the latter does not avoid any existing non-competes involving "senior executives." However, it does prohibit employers from entering or enforcing new non-compete agreements with senior executives after the Final Rule's effective date.
A "senior executive" is defined as a person in a "policy-making position" who earns an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments). A "policy-making position" includes a company's president, chief executive officer, or the equivalent, including any other officer with policy-making authority or any other person with policy-making authority like that of an officer with policy-making authority.
The Final Rule also does not apply to non-competition provisions that exist are pursuant to a bona fide sale of a business entity, so long as the sale involves the disposition of the person's ownership interest in the business entity, or all or substantially all the entity's operating assets.
Simplified Notice Requirements
The proposed rule would have required employers to legally modify existing non-competes by formally rescinding them. The Final Rule simplifies these obligations. Now, employers only need to provide notice to any employee currently subject to a non-compete that the agreement will not be enforced against them in the future. To help employers comply with this requirement, the FTC included model language in the rule that employers can use to communicate with workers.
Preemption Of Less Restrictive State Laws And Legal Challenges
The Final Rule "supersedes" any state laws regarding non-competes to the extent that they are inconsistent with the rule, though states are free to pass laws that go beyond the "protections" the rule provides. As such, business owners with employees in multiple locations should still familiarize themselves with any state laws on the subject.
The issues in court challenges illustrate the limitations of the FTC's ability to enforce the Final Rule. Congress has never established a private right of action under Section 5 of the FTC Act, nor has it authorized the FTC to recover civil penalties or other monetary relief from parties suspected of engaging in unfair methods of competition. Thus, the FTC is limited to obtaining an injunction in Federal Court for purported violations of the Final Rule.
Regardless of the Final Rule's fate in the courtroom, business owners who rely on non-competition provisions to protect their business interests should engage counsel to review non-competition language in employment agreements and consider other options for protecting trade secrets and confidential information.
The Final Rule, as noted, demonstrates a continuing effort to eliminate non-compete agreements from the employment and legal landscape. As such pressure mounts, business owners should develop long term strategies to protect legitimate business interests, despite that standard historical tools were a go-to non-compete agreement.
Should anyone have questions or concerns about the Final Rule, non-compete agreements, or alternative strategies to protect legitimate business interests, please contact me at 312-840-7004 or [email protected].
The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. The author expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this article.
