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On this page in February of 2023, we alerted our readers to the proposed rulemaking of the Federal Trade Commission (“FTC”), which threatened to ban the enforcement of employee non-competes nationwide. Nearly a year and a half later, after review and a public-comment period, the FTC has finally acted.

As we wrote in 2023, employee non-compete clauses – contractual covenants which restrict an employee’s right to work for a competitor after the end of the contracted employment – have been around for many decades. They have become part of the fabric of employment in America. All regulation of non-competes has historically been at the state level, with only California, North Dakota, and Oklahoma having near-blanket bans.

Employers view non-competes as critical protections for processes, techniques, pricing structures, customer details and other pieces of an employer’s business that an employee might have stored in his or her head, but that might not strictly qualify as trade secrets. Often this information has taken the employer many years to develop. Without non-competes, what is to prevent the employee from giving all of that information to any new employer who offers an increase in pay in exchange for that information?

On the other hand, employees see these covenants as unfair impediments to earning a livelihood elsewhere if a particular job does not work out, even when the employee is fired or laid off from that job. Why should it be that an employer can use a non-compete to prevent a worker from selling his only talents to another employer, thereby effectively either forcing that employee into unemployment or trapping that employee into forever working for that one employer? This so-called “non-compete trap” keeps wages low, and has been estimated to cost the country 8500 new startups each year – i.e. companies that would have been formed but for these bans on competition.

On April 23, 2024, the FTC announced its decision. By a vote of 3-2, the Commission banned the enforcement of post-employment non-competes nationwide, declaring them to be unfair methods of competition. The FTC estimates that this ban will increase the wages of the average employee by $524 per year, increase patents by 17,000 to 29,000 per year, and decrease health care costs nationwide by 74 billion to 194 billion dollars over the next decade.

The new rule will go into effect on September 4, 2024 if it is not delayed or nullified by legal challenges. Those legal challenges, including a lawsuit filed by the United States Chamber of Commerce, are already underway.

The final rule will prohibit employers from entering into new non-competes or enforcing existing non-competes against employees, with exceptions only for “senior executives.” The rule defines “senior executive” as a worker who (1) earns more than $151,164 per year and (2) is in a “policy-making position” for the employer. A “policy-making position” is defined as a company president, chief executive officer or the equivalent or anyone who has “policy-making authority,” which is in turn defined as final authority to make policy decisions that control significant aspects of a business entity.

This “senior executive” exception is expected to apply to fewer than one percent of all workers, and will only apply to senior executive who are already restricted by non-competes prior to the September 4th effective date of the rule. This provides employers with a small window of time to sign their senior executives to new non-competes – assuming that the non-competes would otherwise be binding under applicable state law.

It must also be noted that the FTC rule only applies to employment-based non-competes. It does not apply to non-competes executed by the seller of a business, which remain enforceable as against any seller/worker owning at least 25% of a business.

Apart from these limited exception for senior executives and business sales, the FTC rule is retroactive. In order to more fully carry out this retroactivity, the rule requires employers to affirmatively notify workers whose non-competes are no longer enforceable that their non-competes are no longer in effect and will not be enforced. This rule is somewhat relaxed from the original proposed rule, which would have required employers to affirmatively rescind existing non-competes.

As a result of this notice requirement, employers should start to put together non-enforcement/non-enforceability notices to be delivered to employees other than senior executives prior to the September 4th effective date of the rule. In its final rule, the FTC provides model language for employers to use in their notices to employees.

Assuming that litigation does not upend or delay the implementation of the final rule, employers will have to consider alternatives to non-competes for protection of their legitimate business interests and trade secrets going forward. The FTC suggests using non-disclosure agreements (which most employers in need of protection already use alongside their non-compete covenants).

Further, restrictive covenants other than non-competes may also be utilized to protect an employer’s business, so long as the covenants do not penalize a worker or function to prevent a worker from taking a job with a different employer. Specifically, to the extent permitted by state law, non-solicitation clauses are permitted by the FTC rule so long as they are not written so broadly as to have the same practical effect as a non-compete. With the new FTC rule in mind, many employers have already started using a combination of carefully drafted confidentiality and non-solicitation clauses in place of non-compete clauses.

Like any new rule of law, the FTC final rule presents traps and pitfalls for the unwary. If you have any questions about the application of the new law to your business, you should contact an experienced business attorney.

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