The FTC’s Recent Ban of Non-Competes—Is the Sky Really Falling? Key Takeaways for Employers

By: Sarah Lancaster

On April 23, 2024, the FTC issued its final rule banning most noncompete clauses.  The final rule is supposed to go into effect 120 days after it is published in the Federal Register (publication has not happened yet). However, the final rule is already subject to legal challenges and may not take effect for some time, if at all.

Legal Challenges

The final rule is already being challenged as a gross overreach by a federal executive-branch agency over an area that is traditionally governed by state law. Less than 24 hours after the final rule was issued, the US Chamber of Commerce and the Business Roundtable filed a lawsuit against the FTC in federal court in the Eastern District of Texas. The lawsuit asks the court to issue a stay to stop the rule from going into effect or at least prohibit the FTC from enforcing the rule while the lawsuit is being litigated. The lawsuit comes after tax service firm Ryan LLC filed the first legal challenge to the FTC rule in a different federal court in Texas. It is likely other similar lawsuits will be filed.  Because this is an issue is of such significance (and because the losing side is likely to continue to appeal the decision up to the highest court), experts believe that this is an issue that could make its way to the Supreme Court.  The appeals process takes time, so it will likely be at least 12-18 months before the issue has been settled by the courts.

Because of the legal challenges to the rule and the time it will take for the courts to ultimately rule on those challenges, there is likely not a need to stop using non-compete agreements or rescind non-compete agreements at this time.

Applicability of Rule

However, it is still important to understand what agreements are covered, what you will need to do if the rule goes into effect, and what steps you should consider taking in case the rule goes into effect in the near future.

The final rule seeks to prohibit “non-compete clauses” which are defined as:  A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

1. 1. 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
   2. operating a business in the United States after the conclusion of the employment that includes the term or condition.

Importantly, customer non-solicitation and employee non-solicitation clauses are still allowed as long as they are not “so broad or onerous that they have the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends.”

There are also exceptions to the final rule for senior executives who earn more than $151,164 and are in “policymaking” positions and for the use of non-competes during the bona fide sale of a business or the sale of someone’s ownership interest.

Next Steps for Employers

When (and if) the final rule goes into effect, employers are required to provide notice to current and former workers subject to a prohibited and active non-compete that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.  The notice must be clear and conspicuous and provided in written (or digital) form and delivered by hand, mail, email, or text message – oral notice is not sufficient.  The final rule provides model notice language for employers.

While no immediate action is required, employers may want to take steps to prepare for the potential implementation of the rule, or a modified version of it. Additionally, it may be a good time to review your existing non-compete agreements for compliance with the current state laws in the states where those employees are located, as several states have recently passed legislation affecting non-competes and other post-employment restrictive covenants.  We recommend taking the following steps:

• Prepare an inventory of agreements containing non-compete clauses (including agreements for contractors, interns, etc.) prohibited by the final rule and determine which workers qualify as “senior executives” and are exempted by the final rule so you know who you will need to provide notices to when the rule goes into effect;
• Analyze your current non-compete clauses and evaluate whether you can adequately protect your business with narrowly tailored non-solicitation provisions that are still be enforceable under the final rule.  Along the same lines, you should also analyze your current non-solicitation provisions to ensure they are not “so broad or onerous” that such provisions would be seen as prohibited by the final rule; and
• Ensure that your trade secrets and confidential information are properly protected to reduce any potential harm to your business now and if/when the final rule takes effect.

Any of the attorneys at our firm are happy to assist you with understanding the impact of the final rule and ensuring your interests are adequately protected.