from the editors of FELI

On April 23, 2024, the Federal Trade Commission (FTC) voted, 3 to 2, to ban nearly all noncompete agreements. The ban is scheduled to become effective on September 4, 2024. Whether the rule will become effective remains an open question because it is already subject to litigation from various business groups, including the U.S. Chamber of Commerce, claiming the FTC doesn’t have the authority to issue the rule.

Highlights of Rule

The final rule bans the use of nearly all noncompetes for any worker. The definition of a “noncompete” includes “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work in the U.S. with a different person or operating a business after the conclusion of the current employment. The broad definition of “noncompete” includes not just noncompete agreements or noncompete clauses in other agreements but also any terms in handbooks or in workplace policies “whether written or oral.”

The rule’s definition of “worker” is also broad, including any “natural person who works or previously worked, whether paid or unpaid . . . including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service.”

For any worker, the rule states that it is an unfair method of competition for a person to enter into or attempt to enter into a noncompete agreement, enforce or attempt to enforce such noncompete agreement, or to represent that the worker is subject to a noncompete agreement.

A principal exception to the total ban is for senior executives who entered into noncompetes before the effective date of the final rule. Senior executives are those workers who are in a policy-making position and received compensation of at least $151,164 in the preceding year. A “policy-making position” is limited to a business entity’s president, chief executive officer or equivalent, any other officer or person who has policy-making authority. “Policy-making authority” includes “final authority to make policy decisions that control significant aspects of a business entity or common enterprise” but does not include having final authority for policy decision for a subsidiary or affiliate of a common enterprise. The precise application of these definitions is certain to be litigated.

For existing noncompetes, the entity that entered into the agreement with a worker must provide a “clear and conspicuous” notice to the worker by the effective date that the noncompete clause will not and cannot legally be enforced against the worker. The notice must identify the person who entered the existing noncompete with the worker and be delivered by hand, by mail, by email, or by text message to the worker. The only exception is if the entity that entered the noncompete has no record of where to contact the worker. The FTC has offered a proposed notice.

The other exceptions to the use of noncompetes are as follows: (1) pursuant to a bona fide sale of a business, (2) where a cause of action is related to a noncompete accrued prior to the effective date, or (3) when a person has a good-faith belief that the rule is inapplicable.

The final rule supersedes state laws to extent they would permit conduct that is an unfair method of competition or conflict with the notice requirement.

Implementation

The U.S. Chamber of Commerce in Ryan v. Federal Trade Commission has asked the federal district court in the Eastern District of Texas to stay (halt) the rule’s effective date, to implement a preliminary injunction barring the FTC from enforcing the rule, or both.

In light of the pending judicial challenges to the rule, employers may choose to wait until a final outcome is reached before responding to the rule. However, prudent employers may wish to identify to whom notices would have to be sent if and when a final rule including that provision is approved and to identify any agreements or handbook provisions that might be covered by the ban.

The Federal Employment Law Insider (FELI) is written by David S. Fortney, H. Juanita M. Beecher, and Burton J. Fishman of FortneyScott.