Noncompetition clauses have long been a controversial but widely used tool to restrict employees from working for a competitive business after their employment ends.
On April 23, 2024, the Federal Trade Commission (“FTC”) took another step towards upending employers’ ability to prevent competition by former employees by passing a Final Rule that largely prohibits post-employment non-compete agreements. The Final Rule in effect bans any written or oral term or condition of employment that prevents workers from leaving employment and working elsewhere.
The rule makes it unlawful to enter into a non-compete clause, enforce or attempt to enforce a non-compete clause, or represent that a worker is bound by such a clause. For typical workers this prohibition applies to noncompete clauses entered into after the effective date of the rule as well as prior to the effective date. The rule imposes a written notice requirement on employers to advise workers by the effective date of the Final Rule that their respective noncompetition clauses cannot be legally enforced. For senior executives, defined as policy makers who make total compensation of at least $151,164, noncompete clauses entered into before the effective date of the Final Rule will remain in effect and enforceable.
The Final Rule provides an exception for non-compete agreements entered into in connection with an individual’s sale of a business. The rule states that it does not apply to non-compete agreements entered into “by a person pursuant to a bona fide sale of a business entity,or the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” The rule does not contain an ownership percentage threshold for this exception to apply. The rule also allows for the enforcement of a non-compete agreement where the company’s cause of action accrued prior to the effective date of the Final Rule. In essence, the Final Rule does not materially change the way businesses approach non-competition in the sale of a business. However, agreements with key employees, who are non-owners, will have to comply with the ban, if and when it becomes effective.
Employers are still able to use confidentiality, non-disclosure, and trade secret language to protect proprietary information. Non-solicitation clauses, which prohibit employees from soliciting clients and customers, were the subject of much discussion in the rule making process, but ultimately are not considered noncompete clauses unless they are so broad that they prevent an employee from seeking or accepting work or starting a business. The FTC takes the position that regardless of the label on the employment restriction, if it functions to prevent a worker from taking a job, it falls within the definition of non-compete clause as defined.
The Final Rule will become effective within 120 days of its publication in the Federal Register. Right now, the anticipated effective date is late August 2024. However, the U.S. Chamber of Commerce and other business groups have already filed legal action against the rule, which could delay the rule’s implementation and ultimately prevent the rule from taking effect. Given the extensive legal challenges to the rule, it is difficult to predict if or when the Final Rule will go into effect. We will continue to monitor and provide updates on the legal status of the Final Rule.
Employers are advised to consult with legal counsel to discuss the Final Rule’s effect on their business and to develop strategies for the short-term, while legal challenges are pending, and strategies for the long-term if the rule does go into effect. If you would like to discuss the Final Rule and its implications for your company, please contact Rachel Felton, Neva Stotler, or other members of our employment law team.
This article should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only and you are urged to consult a lawyer concerning your own situation and legal questions.
