FTC Finalizes Non-Competes Ban
A divided Federal Trade Commission (FTC) approved on April 23 final regulations that will largely prohibit employers from entering into new non-compete agreements with employees and will require existing non-compete clauses to be rescinded.
According to the rule’s preamble, non-compete agreements are an unfair method of competition under section 5 of the FTC Act. The Non-Compete Clause Rule goes into effect 120 days after publication in the Federal Register.
While ILMA continues to analyze the 570-page final rule, some highlights are included below.
What agreements are banned under the new FTC rule?
The FTC defines a “non-compete clause” in the final rule as:
a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.
The broad prohibition on non-compete agreements applies to workers who may be employees, independent contractors, externs, interns, volunteers, apprentices or sole proprietors who provide a service to a client or customer.
The rule applies to any person or employer, including a natural person, partnership, corporation, association or other legal entity within the FTC’s jurisdiction.
What happens to existing non-compete agreements?
Existing non-competes for all workers, except those who qualify as “senior executives,” are effectively banned. Employers are required to provide “clear and conspicuous notice” to all workers whose agreements have been declared unenforceable that their non-compete clause will not be, and cannot legally be, enforced against them. The notice must be in writing and delivered by hand, mail, email or text message. The FTC provides model language for this required notice.
In a change, the FTC in the final rule did not invalidate pre-existing non-competes with “senior executives.” Senior executives, however, are not carved out of prospective non-competes. A “senior executive” is defined as a worker (a) in a “policy-making position,” and (b) earning at least $151,164 annually in salary, bonuses and/or commissions, but excluding fringe benefits, retirement contributions and medical and life insurance premium payments. A “policy-making position” is a business’s president, CEO or equivalent, or any other person with “policy-making authority” for the business. The term “policy-making authority” means the authority to make final policy decisions controlling “significant aspects of a business entity or common enterprise.”
How about other types of restrictive covenants, such as non-solicitation and confidentiality agreements?
The FTC’s expanded definition of “non-competes” could extend to customer and employee non-solicitation and confidentiality agreements if those provisions are broad enough to be construed as preventing “a worker from seeking or accepting” employment. The FTC states that whether any given contractual provision constitutes a “non-compete clause” is a “fact-specific inquiry.” ILMA anticipates considerable litigation over what constitutes a fact-specific inquiry if the overall final rule survives legal challenges.
Are trade secret protections affected?
As a legal matter, the new FTC rule does not affect trade secret protections. State and federal trade secret laws will remain in place and employers will retain the same rights to protect trade secrets under those laws. However, the final rule may have severe practical effects on trade secret protections because (1) non-competes and similar provisions are a critical part of ensuring employees do not use trade secret information to compete unfairly, and (2) invalidating confidentiality provisions may eliminate a contractual protection for information that may not rise to the level of a trade secret.
What happens to state laws regulating non-competes?
The Non-Compete Clause Rule supersedes all state laws, regulations, orders and interpretations of them that are not consistent with the requirements in the final FTC regulation. States can still impose requirements and restrictions on non-compete clauses if they afford greater protections than those provided by the FTC’s final rule.
Are there any exceptions?
The FTC will allow non-compete clauses entered into between a buyer and a seller of a business, provided the sale involves the disposition of the person’s ownership interest in the business entity, or all or substantially all of the operating assets of the business.
Further, the ban does not apply to existing litigation seeking to enforce a non-compete agreement.
What's next?
The Non-Compete Clause Rule is already being challenged in the courts. The U.S. Chamber of Commerce, Business Roundtable and two Texas associations have already filed a complaint against the FTC and the non-compete rule. More petitions for judicial review are expected in the days ahead, in part questioning whether the FTC has the statuary authority to issue the regulation.
It is likely that many employers will take a wait-and-see approach, because employers will have 120 days after publication of the final rule to comply with it, and it is highly probable that one or more courts may issue stays of the rule’s effective date. However, ILMA General Counsel Jeffrey Leiter reminds ILMA members that many states are limiting the use of post-employment restrictive covenants, so employers should continue to be thoughtful about narrowly tailoring non-competes, non-solicitations and confidentiality agreements.