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FTC Bans Most Non-Compete Agreements


If you follow business news (even just your own industry's), you have no doubt heard about the new FTC rule: the FTC instituted a comprehensive ban on new noncompete agreements ("NCA") with all workers, including senior executives. The FTC determined that the rule would foster competition (and that NCAs harm the labor market, prevent the formation of new businesses, etc.). The FTC announced the rule on April 23, 2024 on a split 3-2 vote, and several groups have already sued to prevent its enforcement.


What is an NCA? 


In general, a non-compete agreement or clause (also called a covenant not to compete) is an employment contract in which the employee agrees not to work for a competitor of their employer. They tend to discourage employees from leaving to work with or for competitors.


What is the new rule?


The rule states that it is an unfair method of competition (meaning a violation of the Federal Trade Act's Section 5) for persons to enter into NCAs with workers after the rule's effective date. It does not ban non-solicitation or non-disclosure agreements per se, but where such agreements effectively act as an NCA,


In short, if you generally have NCAs in your employment agreements, it's time to remove it.


What about existing NCAs?


For existing NCAs, the rule treats workers and senior executives differently. For most workers, NCAs will not be enforceable, even if entered into prior to the rule's effective date. For senior executives, the rule allows those to remain in effect. Presumably, this is due to senior executives having greater bargaining power at the time of negotiating their NCAs.


It's worth noting that, unlike the proposed rule, the adopted rule does not have a rescission requirement. That is, employers don't have to contact former employees and rescind those parts of their agreements. However, the rule does keep in place the duty to inform those subject to NCAs. Employers have until the effective date to do so.


Whom does the rule affect?


The rule affects any for-profit business with an existing NCA. As mentioned above, existing NCAs (that is, NCAs in existence prior to the rule's effective date) with senior executives may still be enforced after the effective date. If you have an existing NCA, or plan on entering into any NCAs in the future, familiarize yourself with the rule.

When does the rule go into effect?


The rule goes into effect 120 days after the rule is published in the Federal Register. As of May 4, 2024, it has not been published, so there is still a little time for employers to prepare.


Are there any exceptions?


Some larger institutions are excepted (e.g., banks, savings and loan institutions). Otherwise, you're left with just a handful: (1) NCAs with senior executives entered into prior to the effective date, (2) NCAs made in the connection with the sale of a business, and (3) where a cause of action related to an NCA accrued prior to the effective date.


For the first exception, "senior executive" is defined as a person in a policy-making position in the business (e.g., CEO) who makes over $151,164.00 per year.


For the second, if you are purchasing a business, you may require an NCA of the selling party as part of that transaction. This is fairly common. For example, if I sell my business, it won't do the buyer much good if I can turn around and open a new, competing business across the street. That would potentially kill the value of the sale. So in that context, NCAs are permissible.


For the third, this means if you could file suit to enforce an NCA prior to the effective date, then the NCA will remain in effect. For example, if I have an NCA with an employee who begins competing today, I could file suit after the effective date. The stated reason is to avoid making existing NCAs unenforceable as of their own effective dates.


Is this constitutional?


This is always the question. Several parties have already sued to prevent the rule's enforcement. On April 23, 2024, the US Chamber of Commerce filed suit in the Eastern District of Texas (Case No. 6:24-cv-00148). The Chamber's complaint alleges violations of the Administrative Procedures Act, including that the rule is beyond the scope of Congress's delegation to the FTC. We shall see how that plays out.


Conclusion


If you have an existing NCA, you probably don't have just one. Get in touch with your attorney and start discussing how to handle this. Although the rule is not yet in effect, and there is existing litigation related to its enforcement, it is best to have a plan.

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