April 25, 2024
By: Rupa Lloyd, Jorge Espinosa, David Allen, and Hunter Patrick
On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to ban noncompete agreements nationwide. Under the Final Rule (language of the Final Rule can be found beginning on page 561), employers are prohibited from imposing and enforcing non-competes on their workers. The Final Rule is far-reaching and impacts not only the employer-employee relationship but also that of business owners and contractors. The Final Rule defines “workers” as employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide services to a person. Moreover, the Final Rule requires that notice be provided to workers before the effective date, alerting them that non-competes cannot be legally enforced.
This long-anticipated move aims to enhance worker mobility and foster fair competition in the job market by removing barriers that traditionally limited employees' career options and stifled innovation. “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
While the rationale behind the ban sounds positive, many employers and business owners may be shocked when considering the potential repercussions to the proprietary interests of the businesses they have spent their careers building.
Key takeaways:
- Covers employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors that provide services to a person.
- Allows existing non-competes with “senior executives” to remain in effect.
- “Senior executives” are workers earning more than $151,164 who are in a “policy-making position.”
- After the effective date, an employer may not enter into a noncompete agreement with any worker, even a “senior executive.”
- Specifies that it is considered an unfair method of competition for a person:
- To enter into or attempt to enter into a noncompete clause;
- To enforce or attempt to enforce a noncompete clause; or
- To represent that a worker is subject to a noncompete clause.
- Requires employers to provide clear and conspicuous notice to each worker who entered a noncompete by the effective date of the rule that the worker’s noncompete will not be, and cannot legally be, enforced against the worker.
- Although employers can satisfy the notice requirement by using the model language contained in proposed 16 C.F.R. § 910.2(b)(2), this may have unintended consequences. Before sending out any notice, Employers should consult with their attorney to determine if a more limited notice is adequate and appropriate.
- Includes an exception that allows non-competes between the seller and buyer of a business.
- Nondisclosure agreements are unaffected.
What happens next?
The Final Rule will go into effect 120 days after publication in the Federal Register, which is expected to occur shortly.
The final action issuing the rule is lengthy. At a minimum, read the FTC Press Release and FTC Fact Sheet.
Legal challenges are underway, and we expect more to come. Less than 24 hours after the FTC announced the Final Rule, the U.S. Chamber of Commerce filed a lawsuit in the Eastern District of Texas challenging the Final Rule. We expect other interested parties will raise similar challenges, but there is no certainty that these will prevail.
What should businesses do?
- Business owners should consult with legal counsel to determine whether it is best to send the Model Notice in the Final Rule or to develop compliant language customized to their business objectives.
- One such strategy includes having counsel review and strengthen their current NDAs or implement new NDAs with the expectation that the FTC ban will be enforced.
Questions?
For more information, contact GrayRobinson Attorneys Rupa Lloyd, Jorge Espinosa, David Allen, and Hunter Patrick or a member of the Business Law, Intellectual Property, or Labor and Employment Sections.