Noncompete agreements have traditionally served as a tool for businesses to prevent employees from working for competitors or starting competing businesses after they leave their job. In recent years several states have begun banning noncompete agreements entirely, including California, Minnesota, Oklahoma and North Dakota, with others implementing restrictions on their use in the form of salary thresholds and advance notice requirements.
On April 23, 2024, the Federal Trade Commission (FTC) made swooping headlines as it voted to approve a nationwide ban on noncompete agreements, which may affect tens of millions of workers in the US currently covered by such agreements. In this article we’ll go over what the new rule seeks to require, current legal challenges to the new rule, and practical steps employers should consider in anticipation of the new rule going into effect.
What the New Rule Requires:
Under the FTC’s new rule, existing noncompete agreements for the vast majority of workers may no longer be enforceable. The new rule is set to take effect 120 days after it is published in the Federal Register, but may be subject to significant delays due to ongoing legal challenges to the new rule as described below. While the new rule will not affect the enforcement of similar state-specific laws that ban the use of noncompete agreements, it will preempt such state laws that conflict with the new rule.
The new rule broadly defines a noncompete as any “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The new rule similarly defines “worker” broadly as “any natural person who works, whether paid or unpaid, for an employer,” including any independent contractors, interns/externs, volunteers, apprentices, or sole proprietors.
Under the new rule, only those existing noncompetes for senior executives (i.e., workers earning more than $151,164 annually and who are in a “policy-making position”), may remain in force. For all other workers who are not senior executives, existing noncompetes will be no longer enforceable. Employers, however, will be prohibited from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will also be required to provide notice to workers (other than qualifying senior executives) who are bound by an existing noncompete that any such noncompete will no longer be enforceable against them.
The new rule does have some narrow exceptions employers should be aware of. For example, the new rule does not prohibit employers from preventing employees from competing during the term of their employment. The new rule also does not apply to franchisee-franchisor agreements or agreements between buyers and sellers of a business. Further, it does not prohibit employers from entering into nondisclosure agreements (i.e., NDAs) or customer non-solicitation agreements, unless such agreements are overly broad and operate, as a matter of fact, as noncompete agreements. Violations of the new rule may result in adjudication under Section 5(b) of the FTC Act or injunctive relief (i.e., cease and desist orders) under Section 13(b) of the FTC Act against a violating party, as well as civil penalties for violating such orders.
Legal Challenges to the New Rule:
Several big business groups, in conjunction with the U.S. Chamber of Commerce, have already filed legal challenges to the rule, claiming the FTC does not have the legal authority to implement the new rule and citing the long-standing right of employers to protect their trade secrets and other confidential and proprietary information acquired by employees during their employment through the use of noncompete agreements.
According to the U.S. Chamber of Commerce’s press release, “the FTC’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” further adding that, “This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy.”
It is also worth noting that the FTC’s new rule contains severability language, meaning that if any provision of the new rule is held to be invalid or unenforceable, or stayed pending further agency action, any such invalidity or unenforceability will not affect the remaining provisions of the new rule. This may play a significant role in the ongoing legal challenges to the new rule.
Employer Considerations Moving Forward:
In light of the aforementioned legal challenges, it is unclear whether the new rule will withstand such legal challenges, and if it does, when it will take effect. The new rule is expected to take effect sometime in August or September 2024, but will likely be extended due to the legal challenges to the new rule. Employers should nonetheless be proactive and begin reviewing their current employment agreements to determine which noncompetes, if any, will remain in force under the new law. Employers should also be prepared to pursue alternative measures in the form of NDAs or non-solicit agreements to protect their trade secrets and other confidential or proprietary information.
McCarthy Duffy’s employment attorneys will continue to monitor any new developments with respect to the FTC’s new rule. If you have any questions regarding this new rule, please contact McCarthy Duffy employment attorney Chris Diaguila.
Featured Professional:
Chris Diaguila
cdiaguila@mccarthyduffy.com
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