FTC Bans Non-compete Agreements for Nearly All U.S. Workers

Sensible Move or Overreach?

By Meaghan Murphy, Esq. and John Gannon, Esq.

Non-compete agreements have long been the subject of intense debate. Some view them as a critical way to protect confidential and proprietary business information, while others view them as stifling the rights of workers to freely change jobs.

Taking the latter view, last year, officials at the Federal Trade Commission (FTC) proposed banning the use of non-compete agreements in the workplace. Because non-compete agreements prohibit workers from moving to or starting competing businesses for a designated period of time, from the FTC’s perspective, restrictions on employee mobility disadvantage workers who are seeking to change jobs, while at the same time harm businesses looking to hire employees. The net result, according to the FTC, hurts the economy overall and violates the Federal Trade Commission Act, which prohibits businesses from engaging in unfair methods of competition.

Just a few weeks ago, the FTC officially moved forward with its plan to eliminate non-compete agreements when it issued a final rule that will ban non-compete agreements nationwide starting Sept. 4, 2024. The new rule will impact an estimated 30 million workers — approximately one in five workers in the U.S.

“The rule does not impact non-disclosure and confidentiality agreements or non-solicitation agreements unless they prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work or operating a business.”

In this article, we take a closer look at what is required by the new rule, legal challenges to the nationwide ban, and strategies for employers who have non-compete agreements currently in place.

 

What Does the Rule Actually Say?

Here are the most important things businesses need to know about the new rule slated to take effect on Sept. 4 of this year.

Employers are prohibited from entering into or attempting to enter into a non-compete agreement with any employees. Also, with one limited exception (discussed below), employers will not be able to enforce non-compete agreements currently in place. Further, there is an affirmative obligation on employers to provide clear and conspicuous notice to workers with existing non-competes that those agreements will not be enforced against them.

There is a ‘senior executive’ exception: for senior executives, which are defined as those in “a policy-making position” earning more than $151,164 annually, it is unlawful to enter into new non-compete agreements after Sept. 4, but current non-compete agreements for senior executives will be allowed to stay in effect even after the effective date of the rule.

The rule does not impact non-disclosure and confidentiality agreements or non-solicitation agreements unless they prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work or operating a business. In other words, as long as those agreements are not worded so broadly as to essentially be non-compete agreements, they are safe.

As is often the case, there are some exceptions to the rule. For example, the rule does not apply to workers at nonprofits. Non-competes between franchisors and franchisees are exempted, so any such agreements remain lawful to have or enter into in the future. The same goes for non-competes between the seller and buyer of a business.

 

Legal Challenges

Business advocacy groups have taken issue with the non-compete ban from the get-go, arguing that the FTC’s actions are classic government overreach. The U.S. Chamber of Commerce — which touts itself as the world’s largest business-association advocacy group — announced its intention to file a lawsuit to block the rule months ago.

The chamber emphasized that non-compete agreements are — and should continue to be —upheld or struck down under well-established state laws and, further, that such a broad rule applied to all businesses across all sectors is not appropriate for the FTC to implement unilaterally.

In addition to the Chamber of Commerce’s lawsuit, a global tax services and software provider based in Dallas (Ryan, LLC) is challenging the rule in a federal district court in Texas. According to that company, non-competes are a valuable tool for firms to protect their intellectual property and foster innovation, and the FTC rule would upend businesses’ ability to do both.

Several motions have been filed in that case, and the court has suggested that it will issue a ruling on the legality of the FTC’s rule soon. Whichever way that court decides, employers can expect the losing party to appeal the decision to the Court of Appeals. After that, it’s possible the U.S. Supreme Court will weigh in.

 

What Should Employers Do?

Employers should collaborate with legal counsel to review all existing non-compete agreements and assess whether they will pass muster under the new FTC rule. If a business determines that most (if not all) of its non-compete agreements will be unenforceable come Sept. 4, management needs to craft a new plan aimed at protecting customer goodwill and shielding sensitive confidential information from disclosure.

As noted above, for the most part, non-disclosure and confidentiality agreements and non-solicitation agreements are not affected by the FTC’s non-compete ban. When properly drafted, these agreements can achieve the same goals as a non-compete without running afoul of the new FTC rule.

Businesses should also monitor the status of the FTC’s rule. We expect courts will issue important rulings in the FTC non-compete rule litigation very soon. If those decisions leave the rule in place in its current form, employers may need to issue notices compliant with the rule to those workers that fall within its protections, as well as refrain from requiring non-competes be signed by any workers in the future.

 

John Gannon is a partner with Springfield-based Skoler, Abbott & Presser, specializing in employment law and regularly counseling employers on enforcing restrictive covenants and protecting trade secrets. Meaghan Murphy is an associate with the firm and specializes in labor and employment law; (413) 737-4753.