FTC's New Rule Effectively Bans Non-Competes – What Now?

The Federal Trade Commission issued the Non-Compete Clause Rule (the “Rule”) on April 23, 2024, by narrow 3-2 vote, banning a vast majority of non-competes nationwide. Both existing and new non-competes are no longer enforceable.  Limited exceptions exist for non-competes with “senior executives”—defined as workers earning more than $151,164 annually and who are in policy-making positions—and non-competes created subsequent the sale of a business, which may still be enforced.  The Rule states that all employers with now unenforceable non-competes are required to provide notice to affected employees that the non-compete is now void.

The Rule was originally posted for comment in January 2023, receiving over 26,000 comments during the required 90-day public comment period—more than 25,000 of which support this proposed ban.  The FTC found non-competes “an unfair method of competition, and therefore a violation of Section 5 of the FTC Act,” noting there are alternatives to non-compete agreements, such as trade secret laws and non-disclosure agreements; notably, nearly 95 percent of workers with non-compete agreements also have non-disclosure agreements.  The FTC argues companies can retain workers previously subject to non-competes “on the merits,” by raising wages, increasing benefits, and improving their work environment.  Other groups in favor of this ban argue non-competes restrict job mobility, depress wages, and quash innovation by limiting employees seeking to start their own companies.

Importantly, the Rule traces back to the Biden Administration’s 2021 “Executive Order on Promotion Competition in the American Economy.”  That Executive Order encourages all relevant federal agencies to address anticompetitive practices within their scope of jurisdiction.  Because of this, opponents argue that the FTC, with this Rule, extends past its jurisdictional reach.

The U.S. Chamber of Commerce, along with other prominent groups like the Business Roundtable, immediately sued the FTC in federal court in Texas after the announcement.  The USCC contends the FTC lacks authority to promulgate this Rule, stating this type of monumental change in business practice must to be passed by Congressional vote instead.  Additionally, many critics state the Rule imposes extraordinary burdens on businesses in protecting their trade secrets, will cause inflation to skyrocket due to predicted wage increases, and ignores state sovereignty since existing state laws already govern non-competes and should continue to do so.  While many states have various laws limiting non-competes in some way, only four have banned them entirely prior to this Rule.

The lawsuits could take months (or longer) to unfold and may put the status of non-competes, and the employees that hold them, in limbo.  The Rule, while final, is not effective until 120-days after the date of its publication in the Federal Register.  Currently, the Rule is scheduled for publication on May 7, 2024, putting the Rule into effect September 4, 2024.  Therefore, it is vital for employers to assess what steps must be taken now to prepare.  Employers not only must inform their current employees of any applicable changes, but must also shift their hiring and retention strategies.

Key Takeaways

Even in light of current challenges, employers should remain proactive in preparing for the Rule’s publication and enforcement by:

• Evaluating current employee contracts for non-compete provisions which violate the Rule, assessing whether revision or rescission is required;
• Identify ways to meaningful meet employer’s goals (protect proprietary information; evaluate trade secrets, non-disclosure agreements, confidentiality practices; etc.) while balancing employee satisfaction and allegiance (performance-focused incentives; benefits; work environment/culture; etc.); and
• Begin drafting requisite (per the Rule) correspondence to current and former employees about any non-competes no longer enforceable.