The Federal Trade Commission Act, 15 U.S.C.S. §§ 41-58, authorizes the FTC to investigate and prevent unfair methods of competition that affect commerce. Section 5 of the Act empowers the FTC to curb “unfair competition” and declares such methods of competition in or affecting commerce as unlawful. On April 23, 2024, the FTC issued its final rule against what it deems as the unfair use of post-employment covenants non-compete agreements. Non-compete agreements are contract terms that restrict a worker’s freedom to accept employment with competing businesses or otherwise compete with the employer following the conclusion of employment for a period of time. The FTC deems non-competes an unfair method of competition that suppresses wages, hinders worker mobility, and stifles new business formation and innovation. The rule faced a 3-2 vote along party lines, with dissenting commissioners arguing the FTC lacks authority to create a rule banning non-compete agreements. Lawsuits have already been filed challenging the rule.
The key points of the regulation are:
- It prohibits employers from entering into new non-compete agreements with workers after the rule’s effective date which is currently August 22, 2024 (120 days after publication in the Federal Register).
- Existing non-compete agreements will no longer be enforceable for the vast majority of workers after the effective date.
- Employers must provide notice to both current employees and former employees with non-compete agreements that the agreements will no longer be enforced.
- The rule provides the safe harbor language for employers to utilize when notifying employees that they no longer have a non-compete agreement. The safe harbor language reads, “You may seek or accept a job with any company or person, even if they compete with [insert Employer’s name] and you may run your own business, even if it competes with [insert Employer’s name].”
- An exception is made for “senior executives” earning over $151,164 annually. Existing non-competes for this small group can remain in force, but employers cannot enter into new non-competes with senior executives after the effective date.
- Another exception to the rule prohibiting non-competition agreements arises out of the sale of a business. If an owner, or partial owner of a business, sells his/her ownership in the business, a non-compete can be made a condition of the sale.
While the rule does not explicitly ban the use of non-solicitation agreements to protect customer relationships, there is some ambiguity and potential risk that certain non-solicitation agreements could be viewed as functionally equivalent to a non-compete under the broad definition used in the rule. The rule defines a “non-compete clause” as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The rule notes that this definition applies not only to explicit non-competes, but also terms that “function as non-competes” by having “the effect of prohibiting the worker from seeking or accepting employment.” The FTC provides examples suggesting some non-solicitation agreements could potentially be viewed as functional non-competes if “written so broadly that it effectively precludes the worker from working in the same field for a new employer.” However, narrowly tailored non-solicitations aimed at protecting the employer’s legitimate business interests may still be permissible.
Given that litigation is already pending, it is yet to be determined whether the regulations will go into effect on August 22, 2024. Nonetheless, we encourage employers to take steps to be proactive. Employers should carefully review their non-solicitation agreements with legal counsel to assess whether they could be interpreted as de facto non-competes under the new rule’s broad definition. Reasonable narrowly tailored non-solicitation agreements may still be enforceable, but overly broad ones face increased risk of being deemed unlawful functional non-competes. Additionally, employers should review their confidentiality agreements and ensure that you have identified trade secrets and have policies and procedures in place to protect them. Finally, it is important to take stock of those employees who are no longer employed but are under non-compete agreements in the event the regulations go into effect and notices need to be sent that the non-compete no longer applies.
If you have any questions regarding the FTC’s regulations and how to best position your company to protect its relationships with customers, as well as protect confidential and proprietary information, reach out to Beckman Lawson’s Labor and Employment team by contacting either Mark Bloom, Craig Patterson, Gary Johnson, Matt Elliott, or Megan Torres at 260-422-0800.