FTC’s Final Rule on Non-Competes May Not be the Final Word

In a controversial move, on April 24, 2024 the Federal Trade Commission (“FTC”) announced that beginning September 4, 2024, it will enforce its Final Rule banning most non-compete agreements that seek to limit a worker’s ability to change jobs. The Rule also requires employers to notify those workers who have non-compete agreements that are nullified by the Rule that these agreements are no longer enforceable once the Rule takes effect; written notices must be sent no later than September 4, 2024. The exceptions to the FTC Rule are few, and extend to non-compete agreements (i) entered into with a business’s senior executives before September 4, 2024, (ii) entered into between a buyer and a seller as part of a bona fide sale of a business, or (iii) that are part of a franchisee-franchisor relationship.

Entering into a non-compete agreement with a senior executive on or after September 4, 2024 will violate the Rule. A worker qualifies as a senior executive under the Rule only if he or she satisfies a compensation test and a duties test. Generally, the compensation threshold is nondiscretionary pay of at least $151,164 annually. The worker must be the business’s president, CEO or the equivalent, or be an officer or an officer-like person who has policy-making authority for the business.

In a comment to the Rule, the FTC states that non-competes that are entered into as part of a business sale will continue to be governed by state law.

The Rule provides that it will not apply to or affect any claim or lawsuit pending prior to September 4, 2024 and attempting to enforce a pre-Rule non-compete agreement, except to the extent that the employer seeks to enforce the pre-Rule non-compete after the Rule takes effect.

The FTC estimates that approximately 30 million American workers are bound by a non-compete agreement, and takes the position that non-competes are unfair methods of competition that violate Section 5 of the Federal Trade Commission Act. The FTC Rule defines non-compete clause broadly as a condition of employment that either prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the U.S. 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 U.S. after the conclusion of the employment that includes the term or condition.

In short, if the Rule withstands court challenges, it will allow most workers who have signed non-compete agreements to go to work for a competitor and/or start their own competing business immediately after leaving employment.

As of this writing there are three reported court challenges: Two lawsuits were filed in federal courts in Texas, and one suit was filed in federal court in Philadelphia. No decision by any of these lower courts is expected before late June. The primary arguments attacking the Rule are that the FTC lacks statutory authority to issue and enforce the Rule, the FTC violated the non-delegation doctrine by usurping a legislative function from Congress, and the FTC’s action in issuing the Rule is arbitrary and capricious.

As it stands now, the Rule banning non-competes takes effect September 4, 2024 pending an injunction issuing by any of the courts in Texas and Pennsylvania. and will apply to most U.S. workers, including independent contractors, regardless of whether the non-compete is oral or written, or in an agreement, a handbook or a policy. Historically, businesses have relied on non-competes to protect trade secrets and confidential information. However, under the Final Rule, businesses will not be allowed to enforce or enter into non-competes with most workers to protect these interests. Therefore, agreements, handbooks and policy statements should be reviewed not only to ensure compliance with the Final Rule, but also to ensure that business trade secrets are otherwise protected once the leverage of non-compete clauses is lost, and to ensure that the required notices are sent.

For guidance about compliance with the Rule and alternative strategies to retain key employees in the face of aggressive recruiting, please contact Patrick W. McGovern, Esq., Partner in the firm’s Labor Law and Employment Law & Litigation Practice Groups, at 973.535.7129, or via email here.