FTC Announces Final Rule Banning Non-Compete Agreements
As I wrote about last year for the NCADA’s Employment Law Practice Group (here), the non-compete agreement is quickly falling out of favor. At that time, we previewed the proposed rule by the FTC that would largely ban non-compete agreements.
On April 23, 2024, the final rule was announced. It bans all new non-compete agreements, and it largely invalidates existing non-competes. Existing non-competes for senior executives remain valid. To qualify as a senior executive, a worker must earn more than $151,164 annually and be in a policy-making position.
Employers will also be required to provide notice to workers who are bound by an existing noncompete that they will not be enforcing any non-compete agreements. The rule includes a form of notice that can be provided to workers.
There are a few limited exceptions to the new rule.
First, a non-compete agreement that is tied to a “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” 16 CFR § 910.3(a). The proposed rule included a threshold ownership interest that must be involved in the transaction, but the final rule has removed that requirement.
Second, if a party has already filed suit based on a pre-existing non-compete, the employer may continue the lawsuit and seek to enforce the non-compete if the lawsuit was filed prior to the effective date of the new rule. 16 CFR § 910.3(b).
And that’s it. So, there are not significant exceptions.
Another question that we have seen is whether the prohibition extends to non-solicitation provisions, which are often included with non-compete provisions. Unfortunately, the answer is that it depends. While the new rule does not categorically prohibit non-solicitation provisions, its tentacles could reach them. As noted in the summary of the final rule:
Non-solicitation agreements are generally not non-compete clauses under the final rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business. However, non-solicitation agreements can satisfy the definition of non-compete clause in § 910.1 where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.
16 CFR Part 910 Summary at 81. This analysis is a “fact-specific inquiry.” It seems unlikely that this test would be met by a non-solicitation provision that prevents hiring away the employer’s other talent. But provisions that prevent the solicitation of clients could be impacted. So, employers must review their existing client non-solicitation agreements to determine whether they comply with the new rule.
The effective date is 120 days after publication in the Federal Register. However, we can expect legal challenges that will likely delay implementation. The US Chamber of Commerce has suggested that it will likely challenge the new rule imminently. If a judge grants an injunction preventing enforcement during the pendency of the legal challenges, the rule will not be effective.
Even with the likely delay in implementation, employers should begin reviewing their restrictive covenants so that they are ready to come into compliance quickly once the rule is implemented.
While this new development will certainly cause concerns for employers moving forward with regard to protecting their respective investment or trade secrets, it is important for employers to be mindful of alternative mechanisms that remain available such as trade secret laws and appropriate modification of non-solicitation and non-disclosures provisions.
Derrick Foard is a member of Ellis & Winters Litigation Group. He is an experienced litigator who focuses his practice on complex commercial litigation with an emphasis on products and general liability matters and employment litigation. Before beginning his private law practice, Derrick completed an externship at the U.S. Equal Employment Opportunity Commission, Charlotte District Office. He is a member of the Lancaster County Bar Association and the Cabarrus County Bar Association, while also serving as a committee member for the Mecklenburg County Bar’s Diversity Equity and Inclusion Committee.
Ellis & Winters attorneys have successfully defended employers against the full range of claims brought by employees and former employees. Federal and state statutes often provide the framework for claims of discrimination or retaliation based on race, age, gender, or disability, but these claims are frequently supplemented by common law claims that may add distinct liability or damages issues to the case. Our experience with these laws and familiarity with employers’ practices enhances the likelihood of a successful result at the earliest possible stage in the litigation. In addition, our attorneys have substantial experience in cases involving restrictions arising from a former employment relationship, including non-competition and confidentiality agreements.