The Federal Trade Commission (“FTC”) published a much-awaited new final rule on May 7, 2024, that effectively bans most non-compete agreements, of which one in five Americans are estimated to be subject. A common misconception that non-competes are mostly applicable to sophisticated and highly paid workers was found to be incorrect by the Commission. A 2014 survey indicated that 53% of workers covered by non-competes were hourly workers. The Commission also found that these agreements trapped workers in their jobs because of fears of defending costly lawsuits—even if the workers believed they would ultimately prevail. The Commission’s stated that the purpose of this rule, which goes into effect on September 4, 2024, was to address these harms.

Of course, there are some exceptions to the final rule for certain cases, such as for individuals considered to be “senior executives” or in the sale of businesses, but the majority of non-compete agreements will be unenforceable following the effective date.

Definition of Non-Compete Agreement

Non-compete agreements have been defined in the final rule as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States 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 United States after the conclusion of the employment that includes the term or condition.”

This definition is not restricted to clauses in written contracts, but applies to all agreements that functionally have the effect of preventing or penalizing a worker from seeking or accepting other work or starting a business. This includes some workplace policies, handbooks, verbal contracts, non-disclosure agreements, forfeiture-for-competition clauses, liquidated damages clauses, and training repayment agreement provisions (TRAPs) that produce such results.

Furthermore, apart from the below-enumerated exceptions, nearly all workers are protected by this rule. This includes independent contractors and sole proprietors who are typically not provided with the protections that employees receive.

Exceptions

There are several exceptions and a number of qualifying factors that are relevant to the implementation of the rule. These notably relate to certain classes of workers, primarily those considered to be senior executives, jurisdictional considerations, and certain entities or relationships.

Senior Executive Exception

The Commission has found that non-competes with senior executives were less likely to result in the acute, ongoing harms currently being experienced by other workers subject to existing non-competes, and senior executives were considered more likely to have had a greater degree of agency in negotiating the non-compete agreements they entered into. There were also concerns regarding the practical impacts of extinguishing existing non-competes for this class of workers that played a role in maintaining this exception.

Therefore, existing non-compete agreements for senior executives will still be enforceable following the effective date of the final rule of September 4, 2024. This applies to any non-competes entered into before the effective date. However, non-compete agreements entered into after the effective date will not be enforceable.

A senior executive has been defined as a worker a) earning more than $151,164 in total annual compensation and b) in a policy making position. The policy-making position must have authority to make policy decisions that control a significant aspect of the business entity without needing higher approval. To qualify, the worker must have policy-making authority with respect to the common enterprise as a whole. Department heads or similar roles would not be considered senior executives. Presidents, CEOs, and other equivalent positions are presumed to be policy-making positions.

Sale of Business Exception

Non-competes entered into pursuant to a bona fide sale may give rise to an exception under § 910.3(a). A bona fide sale is one made in good faith, rather than a transaction whose sole purpose is to evade the final rule.

Miscellaneous Exceptions

Causes of action relating to non-competes accrued prior to the effective date of the final rule are also excepted. This was included due to concerns over retroactivity of the new restriction to existing claims.

The final rule does not apply to non-compete agreements between businesses, nor franchisor/franchisee relationships.

The final rule also does not apply to restrictions relating to concurrent employment of workers. Similarly, fixed-duration contracts are not considered non-competition contracts as they relate to terms of employment only. Additionally, union no-raid agreements and non-solicitation agreements are not prohibited, as well as agreements requiring workers to pay back bonuses that were received in consideration of maintaining employment.

Lastly, there is a good faith basis exception: it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good faith basis to believe that the final rule is not applicable.

Jurisdictional Limitations

The jurisdictional limitations of the FTC also play a role in limiting the applicability of the final rule. Primarily, the final rule only applies to work in the United States or operating a business in the United States. It would not apply to agreements that restrict only work outside the United States, or starting a business outside the United States. It would similarly not apply to non-compete agreements entered into by foreign companies with foreign workers so long as they did not restrict the worker’s ability to work or start a business within the United States.

Some entities are specifically exempted from the final rule, such as banks and “persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act.”

Furthermore, nonprofit entities may also be exempted. This requires application of a two-part test, which evaluates whether there is an adequate “nexus between an organization’s activities and its alleged public purposes and that its net proceeds be properly devoted to recognized public, rather than private, interests.” I.e., the source of the income and the income’s destination must be evaluated.

Ultimately, whether an entity falls under the jurisdiction of the FTC can be a fact-specific determination, and broad categories should not be taken for granted.

Notice Requirement

Employers will be obligated to provide notice to employees or former employees that non-competes they may have been subject to are unenforceable after the effective date of the final rule.

The notice must identify the person or entity who entered into the non-compete with the worker and must either be on paper delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker.

Sample language has been provided that will meet this obligation under the final rule in order to lessen the burden of this requirement. Several translations have also been provided in various languages, which may be included, in addition to the required notice in English.

Miscellaneous: Enforcement, State Laws, Severability

Because of the potential burden of having to rescind a large number of non-compete agreements currently in effect, the FTC instead chose to focus on restricting the future enforcement of existing non-competes.

A “severability clause” like those commonly seen in many contracts has been included in the final rule. The clause states that if a reviewing court were to hold any part of any provision or application of the final rule invalid or unenforceable, the remainder of the final rule shall remain in effect.

The Commission expressly recognizes State authority and the existence of private rights of action arising under State laws that restrict non-competes or bar unfair methods of competition. Section 910.4(b) also explains that persons retain the right to bring a claim or regulatory action under State laws unless the laws conflict with the final rule and have been superseded as described in § 910.4(a).

There is possibility that litigation may delay implementation of this rule, but as of today’s date, the rulemaking process has been finalized.

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If you have questions about a non-compete you signed as an employee, or questions about any contracts your company has required its employees to execute, contact Navigate Law Group for a review of the application of the FTC’s new rule to your case.

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Disclaimer

Every legal issue is very unique. Accordingly, the information in this blog is intended as general education material and not as legal advice. If you think you may have a legal issue, you should consult an attorney.