Important Update Regarding Non-Compete Agreements and FTC Ruling

Apr 26, 2024

On April 23, 2024, the Federal Trade Commission (FTC) implemented a significant rule banning non-compete agreements for most employees. This rule is expected to take effect by the end of August 2024. However, it's important to note that legal challenges are anticipated, which could potentially delay or modify the rule's enforcement. Despite these challenges, this decision reflects a growing national trend towards limiting non-compete agreements. Employers should be aware of the potential impact on their current practices and be prepared to adapt.

The FTC's New Rule
The new rule prohibits employers from enforcing existing non-compete agreements and entering into new ones with most workers. This decision aims to promote worker mobility, foster innovation, and increase competition in the job market.

What You Need to Know​​​​​​

  1. Unenforceability of Existing Non-Compete Agreements: Existing non-compete clauses within employment contracts will be considered unenforceable. While contracts don't necessarily require redrafting, employers will be obligated to notify all current and former workers, including contractors, interns, and volunteers, that these provisions are no longer valid. The FTC has offered model language to simplify the notification process.
  2. Ban on New Non-Compete Agreements: Employers will be strictly prohibited from creating new non-compete agreements moving forward. This includes all employees, regardless of position or title, and contractors. As such, you will need to review your standard employment contract templates to ensure they are compliant. Continued use of non-compliant templates, even unintentionally, could result in civil penalties.

Understanding the Exceptions
While the FTC's rule is comprehensive, there are a few limited exceptions:

  1. Senior Executives: Existing non-compete agreements with "senior executives" may remain enforceable. However, the definition of "senior executive" is narrow. The FTC defines it as workers earning more than $151,164 annually and holding a "policy-making position." It's important to note that less than 1% of workers are likely to qualify under this definition.
  2. M&A Related: A purchaser of a business can generally still enter and enforce a non-compete against an owner, member, or partner of the seller as part of the bona fide sale of a business entity. The FTC has indicated, however, that particularly onerous non-competes, such as preventing the seller from engaging in a business for an indefinite period of time, would be invalid. Here, the key will be to ensure the non-compete is narrowly tailored to meet the specific needs of the deal and avoid being overly restrictive.

Important Considerations Beyond Non-Compete Agreements

  1. Trade Secret Laws and Non-Disclosure Agreements (NDAs): These remain enforceable under the FTC's rule. Businesses can still require employees to maintain confidentiality regarding trade secrets and other sensitive information. However, NDAs should not be so broad that they effectively become non-competes, such as by prohibiting discussion of an entire industry.
  2. Non-Solicitation Agreements: The FTC clarifies that these are "generally not non-compete clauses" because they don't prevent workers from seeking other employment or starting businesses. However, similar to NDAs, non-solicitation agreements drafted too broadly could violate the spirit of the rule.

We're Here to Help You Navigate the New Landscape
Our team understands that navigating these changes can be complex. We're here to provide comprehensive support and answer any questions you may have regarding the FTC's ruling and its implications for your business. We can assist you with:

  1. Drafting compliant notifications to current and former workers regarding unenforceable non-compete agreements.
  2. Reviewing and revising your employment contract templates to ensure compliance with the new rule.
  3. Analyzing existing non-compete agreements for senior executives to determine their enforceability under the narrow exceptions.
  4. Evaluating your NDAs and non-solicitation agreements to ensure they remain compliant and effective.

Stay tuned
Legal challenges to the enforceability of the rule have already been filed. Please consult legal counsel to understand the status of the rule and what changes, if any, make sense for you as you navigate non-compete provisions in employment and business transaction contexts.

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