The Federal Trade Commission (FTC) issued a broad final rule on April 23, 2024, that bans non-compete agreements nationwide. The rule also invalidates most existing non-compete agreements, except those for senior executives and breach of contract actions that accrued before the final rule’s effective date. Employers will be responsible for advising their workers, other than senior executives and a few other exceptions, that their non-compete agreements are no longer valid. The rule will go into effect 120 days after publication in the Federal Register on May 7, 2024. As a result, the final rule’s effective date is September 4, 2024.
The U.S. Chamber of Commerce and various business groups have threatened litigation challenging the FTC’s final rule. Predictably, as of this date, two lawsuits have already been filed in two federal courts in Texas. Critics widely expect that the FTC’s sweeping rule may not withstand constitutional scrutiny under the major questions doctrine and as an impermissible delegation of authority under the Non-Delegation Doctrine. Although federal courts generally must defer to federal agencies’ reasonable interpretations of the laws they implement under Chevron, this doctrine also has been under fire in recent Supreme Court oral arguments. As a result, Chevron may be insufficient to save the final rule in this instance.
Nonetheless, appeals take time, and resolution of those cases may not come for 12 to 18 months after their initial filing. As a result, the FTC’s new rule may soon affect your company’s existing non-compete agreements or your ability to use non-compete agreements. As a result, you need to immediately consult with a Fort Lauderdale business transaction attorney at Kramer Green. Together, we can evaluate your situation, discuss the available alternatives, and determine the legal strategies that best meet your company’s needs.
FTC’s Reasoning for the Final Rule
According to the FTC, the final rule banning non-compete agreements will create 8,500 new businesses annually, representing a 2.7% increase. As a result of the rule, the FTC expects employee earnings to increase, healthcare costs to decrease, and innovation to increase over the next decade.
The FTC estimates that over 30 million, or one in five Americans, are currently subject to a non-compete agreement. The agreements force these individuals to stay in jobs they want to leave, switch to lower-paying jobs in other fields, relocate, or defend against costly litigation. Therefore, the FTC found that requiring and enforcing non-compete agreements are unfair methods of competition that violate Section 5 of the FTC Act.
The Broad Scope of the Final Rule
In addition to non-compete agreements, the final rule bans other restrictive covenants, including non-solicitation agreements, that effectively operate as non-compete agreements. These provisions may operate as non-compete agreements “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.” If a provision effectively penalizes a worker from working in the same field after leaving, it is a non-compete agreement.
The final rule also prohibits forfeiture for competition agreements, which penalize or prevent a worker from seeking or accepting work or operating a business in the U.S. at the end of the worker’s employment. Severance agreements based on non-compete agreements are also banned under the final rule. Furthermore, even if paying a prospective competitor to refrain from working in a particular market would not constitute a prohibited non-compete agreement, it could violate antitrust laws.
Alternatives to Non-Compete Agreements
Employers may still be able to protect proprietary and other business information using non-disclosure agreements (NDAs), which are still permissible. Most individuals currently subject to non-compete agreements are also subject to NDAs.
The final rule also does not explicitly prohibit employers from using customer non-solicitation agreements or employee non-solicitation agreements, except where barred by state laws or local ordinances. To that end, the final rule preempts only state laws that conflict with it.
Trade secrets laws also exist to protect sensitive company information. Furthermore, employers may improve their working conditions and wages to attract and retain workers. This approach may prevent workers from leaving companies and competing with their former employers.
Changes from the Proposed Rule
The final rule differs from the proposed rule in some respects. For instance, current non-compete agreements for senior executives can remain in effect. However, employers cannot issue, attempt to issue, or enforce new non-compete agreements after the rule’s effective date. Senior executives make more than $151,164 per year and are in policymaking positions for the business.
The FTC also eliminated a provision from the proposed rule that would have required employers to rescind existing non-compete agreements formally. However, under the final rule, employers need only give employees clear and conspicuous notice about the change by hand-delivery, mail to the worker’s last-known street address, email, or text message. The notice must identify the name of the person who entered the non-compete agreement with the employee. The FTC has provided model language for employers to inform employees about the final rule.
Other Exceptions to the Final Rule
Aside from the exception for senior executives described above, the final rule is inapplicable to non-competes entered by a person in connection to a bona fide sale of a business entity. Likewise, as mentioned above, business entities may continue to enforce non-compete clauses when the cause of action arose before the final rule’s effective date.
Not-for-profit organizations also do not fall within the purview of the FTC, so the final rule does not apply to those entities. Similarly, the final rule does not apply to banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act.
Other Potential Implications of the Final Rule
The final rule can potentially affect some equity compensation plans and agreements, depending on the terms of the agreement at issue and the validity of the post-employment restrictive covenants in the agreement. For instance, even if the restrictive covenants are invalid, the larger agreement could still be valid if the covenants can be excised from the agreement.
Generally, the final rule should not affect the ability of employers to offer severance packages to employees. However, if severance is to be paid after the final rule’s effective date and is conditioned on compliance with certain restrictive covenants, the final rule could affect some of those covenants. Nonetheless, the final rule would not affect other restrictive covenants, such as those protecting trade secrets.
“Garden leave” provisions, where workers remain employed and receive the same compensation and benefits on a pro rata basis, are not affected by the rule, nor are fixed-term employment agreements with non-complete provisions that are operative during the worker’s employment term.
Finally, training repayment agreements, no-hire agreements, and, as noted above, non-solicitation agreements, are generally unaffected by the final rule unless they are so broad that they effectively function as impermissible non-compete agreements.
Let Us Help Protect Your Legal Interests Today
Due to the uncertainty of litigation related to this final rule and a looming effective date in the coming months, businesses must stay current on this and other important legal issues. A Pembroke Pines business transactions attorney at Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. stands ready to help protect your legal interests, whether you are dealing with changes in the laws that affect your business or handling transactions under existing laws. Contact our office today at (954) 966-2112 or reach out to us online to schedule a time to discuss your legal matter with our attorneys.