The Federal Trade Commission (FTC) recently published its final rule, which prohibits all non-compete agreements, with limited exceptions, for all employees. The rule was supposed to go into effect on September 4, 2024, 120 days after publication in the Federal Register, but was set aside by the U.S. federal court in the Northern District of Texas which ordered that it shall not be enforced. This order applies nationwide. The order will likely be appealed to the U.S. Court of Appeals for the Fifth Circuit but the FTC cannot enforce the Rule against any employer, nationwide, at this time. In addition, the Supreme Court’s recent ruling in Loper Bright case will present an additional challenge to FTC’s appeal. Loper Bright overruled long-standing “Chevron deference” precedent, under which courts afforded deference to a federal agency’s interpretation of its own power. Loper Bright Enterprises v. Raimondo, No. 22-451 (2024)
What are the key bans of the Final Rule?
If the Final Rule becomes law, it will supersede all contrary state laws. § 910.4(a) of the Rule.
The Final Rule broadly bans all non-competes for all U.S. workers (including employees and independent contractors and unpaid workers), subject to exceptions. There are exceptions for existing agreements with “senior executives” and for non-competes entered into as part of the bona fide sale of a business. Under the final rule, the FTC views non-compete agreements as a method of unfair competition under the law.
Non-compete ban under the final rule § 910.1 will extend to all terms or conditions of employment that either “prohibit”, “penalize” or “function to prevent” a worker from either 1) seeking or accepting work in the United States with a different person or business, or 2) operating a business in the United States, after their employment ends. For purposes of the rule, a term or condition of employment includes a contractual work term, regardless of whether the agreement is written. See § 910.1 of the Rule.
In addition to preventing employers from entering into new non-compete agreements, the rule would also require employers to give notice that existing non-competes will not be enforced. § 910.2(b) of the Rule.
Two Exemptions from the Rule
There are two categories of worker non-competes that are not covered by the rule. A Senior Executive, not subject to a non-compete ban, under the rule, are workers in a policy-making position that earns an actual or annualized sum of $151,164, including salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during the preceding 52-week period prior to the worker’s departure. Policy-making positions include the roles of a president, chief executive officer, any other officer or similarly situated person who has policy-making authority for the business entity. Officer includes the SECs definition, including a president, vice president, secretary, treasurer or principal financial officer, comptroller, or principal accounting officer, and any natural person who performs such functions for the business. Policy-making authority is one with the final authority within the business entity to control significant aspects of the entity and to make policy decisions.
Additionally, there is an exception for non-competes in certain “sale-of-business” agreements. § 910.3(a) of the Rule. This exception allows a buyer in a bona fide M&A transaction to enter into a non-compete with the business owner, regardless of the size of the seller’s ownership interest in the target business.
Exempt Companies not subject to the FTC rule include banks, credit unions, savings and loan institutions, some non-profits, and air carriers.
What You Need to Know
While the FTC is currently enjoined from enforcing the non-compete rule (pending any successful appeal) existing non-compete agreements remain legal and enforceable, just as they were before the FTC issued its rule. However, with the increased scrutiny on non-compete agreements, it’s a good time for employers to review and update their existing agreements to ensure they meet the following criteria:
- All restrictive covenants should be carefully drafted to protect legitimate business interests, such as trade secrets, confidential information, or customer goodwill.
- The restrictions should be no broader than necessary, considering duration, geographic scope, and the types of activities that are prohibited.
- Agreements should be written in a way that allows for severability, meaning any unlawful provision can be removed without invalidating the entire agreement.
- Non-competes should not be applied to lower-level employees without a strong justification.
Now is the perfect time for employers to revisit their non-compete strategies to ensure they comply with best practices. Employers can still enforce restrictions that prevent employees from engaging in competitive activities while they are actively employed. In addition, businesses can protect their interests by using alternative measures such as confidentiality agreements, non-disclosure agreements, and non-solicitation clauses.
Filippov Law Group, PLLC, is a reliable, full-service business counsel, dedicated to delivering the best cost-effective legal services for the challenges and opportunities your business faces every day. This includes, but is not limited to the preparation of employment agreements, confidentiality agreements, non-disclosure agreements, and non-solicitation clauses.