FTC’s Non-Compete Rule
On May 7, 2024, the Federal Trade Commission (“FTC”) published the Non-Compete Clause Rule (the “Rule”) that, as of September 4, 2024 (the “Effective Date”), effectively bans almost all non-compete clauses between employers and former employees within the United States.
The ban on non-compete clauses extends to all non-compete clauses, whether they are entered into prior to or after the Effective Date, with some very narrow exceptions. Importantly for businesses who have workers with existing non-compete clauses, the Rule mandates that each business inform those workers that their non-compete clauses are no longer enforceable following the termination of their employment on or before the Effective Date.
The Rule states that it is an “unfair method of competition for a person: (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause; or (iii) to represent that [a] worker is subject to a non-compete clause.” The Rule defines a “non-compete clause” as “a term of condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work with or for a person other than the employer within the United States where such work begins after the conclusion of the worker’s employment with the employer; or (ii) operating a business within the United States that competes with the employer. The Rule’s definition of “worker” is not limited to employees; it also includes independent contractors, interns, and volunteers, whether paid or unpaid.
The Rule does not ban non-solicitation clauses or confidentiality agreements. However, the FTC’s comments to the Rule as published in the Federal Register caution businesses that if these clauses are drafted so broadly as to fall under the Rule’s “functions to prevent” prong, they may be deemed unenforceable non-compete clauses. The FTC did not provide guidance as to how broad is too broad, and this will remain a highly fact-specific analysis going forward. Employers will want to review their existing non-solicitation clauses and confidentiality agreements to ensure that they are tailored to protecting their core businesses, trade secrets, and clients.
Non-compete clauses with senior executives that were entered into prior to the Effective Date may still be enforced. “Senior executive” means a worker who was in a “policy-making position” and received at least $151,164 in annualized compensation during the preceding year. “Policy-making position” means that the worker had the “final authority to make policy decisions that control specific aspects of a business entity[.]” The determination of whether a worker was in a policy-making position and whether their non-compete is still enforceable (assuming they meet the salary threshold) will be an extremely fact-specific analysis.
Non-compete clauses entered into as part of a bona-fide sale of a business are also enforceable. A bona fide sale includes the “sale of a business entity, a person’s ownership in a business entity, and all or substantially all of a business entity’s operating assets.” This will be an extremely important exception for buyers and sellers of businesses. However, the FTC did not provide much guidance on what constitutes a “bona fide” sale of a business and many questions remain open as to how broad the exception’s scope is, particularly as to minority owners of a business.
Finally, the Rule does not preempt litigation or claims regarding a non-compete clause where such claim arose before the Effective Date, so businesses may still proceed against workers who violated their non-compete clauses before the Rule became effective.
As mentioned above, the Rule requires all businesses who have non-compete clauses with current or former workers to send those workers a notice that the business will not enforce their non-compete clauses on or before the Effective Date. The Rule includes a form of notice that is a “safe harbor” for compliance with the notice requirement. The Rule does not state whether or not businesses may add language to the form of notice (in particular, that non-solicitation clauses and confidentiality agreements are still enforceable) and still falls within the safe harbor.
Obviously, the Rule is controversial and has provoked litigation, primarily claiming that the FTC lacks the authority to issue the Rule. To date, the Rule has not been enjoined nationwide by any court. A Texas court did issue a preliminary injunction against the Rule on July 3, 2024, finding that the plaintiffs were likely to succeed in their claim that the Rule is unenforceable but that injunction only applied to the plaintiffs in that particular case. Conversely, on July 23, 2024, a Pennsylvania court declined to issue an injunction against the Rule in a separate case, finding that the plaintiffs are not likely to succeed in their claim that the Rule is unenforceable. The courts’ logic in the two decisions are not reconcilable and this matter will almost certainly eventually reach the Supreme Court. However, again, the Rule is still scheduled to take effect on September 4, 2024, and businesses should prepare to comply with the Rule.