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FTC Votes to Ban Non-Compete Agreements!

4/25/2024

By Attorney Kelly Jesson

But don’t panic because it is already being challenged. The first lawsuit was filed within hours, and other businesses and the U.S. Chamber of Commerce have vowed to challenge the law on the grounds that the Federal Trade Commission (“FTC”) lacks the legal authority to promulgate such a rule. If any of these parties get an injunction, the implementation of the rule may be delayed.

The rule will go into effect 120 days after it is published in the Federal Register. Unfortunately, we don’t know what that date is yet, but we will pass that along when we know (and it should be soon). Assuming the rule goes into effect as the FTC plans, here are the important points:

The rule applies to employees and independent contractors.
There is no need to rescind any existing agreements or redo any employment agreements containing non-competes. They all remain valid except for the non-compete clause. However, employers must notify all other current and former workers who have existing non-competes in place that the agreements are no longer enforceable before the rule goes into effect. The notice must: (i) Identify the person who entered into the non-compete clause with the worker; (ii) Be on paper delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker. There is a sample notice in the final rule that employers can use.
Not all non-competes are banned. The rule does not cover nonprofit organizations. The rule also permits limited use of non-compete agreements between franchisees and franchisors.
The rule also does not apply to non-competition agreements entered into as part of a "bona fide” sale of a business or of a person’s ownership interest in a business entity.
Businesses can continue to utilize agreements to protect their trade secrets and confidential information (like NDAs) to protect proprietary information an employee might learn during employment.
Non-solicitation clauses are not mentioned in the rule, so employers can continue to protect their business’s customers and employees from being poached by others.
Finally, employers may continue to enforce existing non-competes with senior executives, but they cannot enter into new, future non-compete agreements with senior executives. Senior executives are defined as a worker who: (1) was in a policy-making position; and (2) Received total annual compensation of at least $151,164 in the preceding year annualized.

If you think the FTC ruling may affect your business, or if you need assistance with another non-compete related issue, please give Jesson & Rains a call.

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