On Tuesday, the Federal Trade Commission (“FTC”) approved a rule that bans noncompete agreements between employers and their workers. We have prepared the FAQ below to help you understand how this development affects you and your business.
Wait, Is This New News? I Thought There Was Already an FTC Rule About Noncompetes?
The FTC originally proposed a rule banning noncompetes in January 2023. The public had the opportunity to provide comments on the proposed rule. The FTC received over 26,000 comments – some against and some in favor. After digesting those comments, the FTC made modest changes in the final rule it adopted.
What Does the Final Rule Do?
The final rule broadly bans the use of noncompetes with employees. It also voids existing noncompetes with most employees.
Are There Exceptions?
Yes, but they are very limited. The rule allows existing noncompetes with “senior executives” to remain in effect. But once the rule becomes effective, the rule prohibits new noncompetes with all workers, including “senior executives.”
So the Rule Is Not Already in Effect?
No. The rule becomes effective 120 days after it has been published in the Federal Register. As of this alert, it has not been published.
Who Qualifies as a “Senior Executive?”
Under the rule, a senior executive is someone who is in a “policy-making position” and receives annual compensation of at least $151,164. The definition of “policy-making position” is potentially fairly narrow, so counsel should be consulted regarding whether employees are “senior executives.”
What About Covenants Not in Agreements Between Employers and Employees?
The rule has exceptions for noncompetes entered pursuant to the sale of a business or a person’s ownership interest in a business. This exception is broader than in the original proposed rule.
Does the Rule Apply to Other Restrictive Covenants, Such as Nondisclosures, Customer Nonsolicits, and Nonrecruitment Covenants?
The definition of a noncompete includes clauses that not only prohibit a worker from accepting competitive employment but that also “function” to prohibit the worker from competing. This could mean the FTC will view certain types of customer-based restrictions or very broad nondisclosure covenants as noncompetes. However, it appears narrowly tailored customer nonsolicits, nonrecruits, and nondisclosures are not prohibited by the rule.
Does the Rule Apply Across All Industries?
No. The FTC can only regulate for-profit businesses, so the rule does not apply to nonprofits. There are also a few industries that are outside the FTC’s jurisdiction. You should consult with counsel as to whether the rule applies to your industry.
Is the Rule Valid? Can the FTC Really Change the Law on Noncompetes in Georgia?
As expected, the rule is being challenged. The crux of the challenge is that the FTC does not have the authority as a federal agency to regulate noncompetes.
The U.S. Chamber of Commerce is the lead plaintiff in one lawsuit challenging the rule. The Chamber has asked the court to “stay” the rule taking effect while its challenge is litigated. The court has not yet ruled on that request, but it will likely do so before the end of the 120-day period.
If the Rule Survives a Challenge, Do Employers Have to Do Anything?
Yes. The rule requires employers to notify current and former employees that their noncompetes cannot be enforced. The notice must be provided by the effective date. Given the pending litigation challenging the rule, you should consult with counsel as to the timing for sending notices.
How Do the FTC’s Actions Affect My Business and My Employees? What Else Do I Need to Do?
Employers should evaluate their restrictive covenant agreements so they are prepared if the FTC’s rule takes effect. Agreements that have noncompetes will need to be revised. Employers should ensure other covenants are drafted properly so they are enforceable and robust enough to protect confidential information, trade secrets and other assets of the business.
Employers should also evaluate how well they are protecting trade secrets and confidential information. If the FTC’s noncompete ban takes effect, trade secret remedies will take on a more significant role in preventing unfair competition by departing employees.
BFV will closely monitor the status of the FTC’s rule, and we will keep you apprised as new details emerge. In the meantime, we are available to assist you or your business as you evaluate how to respond to these developments.
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READ MORE:
BFV quoted in: “Takeaways From The FTC’s Noncompetes Ban,” Law360 (April 24, 2024 – subscription required)
Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.
Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.