Overview of the FTC’s New Rule on Noncompete Agreements
In a groundbreaking move on April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to institute a comprehensive ban on noncompete agreements under Section 5 of the FTC Act, the Non-Compete Clause Rule (the “Rule”). Section 5 aims to eliminate unfair methods of competition, but the FTC has never before used its authority under the FTC Act to enact such a broad-sweeping ban. The Rule covers all employment-related non-compete agreements throughout the United States, with far-reaching implications for both employers and employees. However, questions remain about the scope of the FTC’s authority under the Constitution, and whether the Rule will be able to withstand legal challenges.
The Rule becomes effective 120 days after publication in the Federal Register. Publication is scheduled for May 7, 2024. Therefore, the Rule is expected to become effective on September 4, 2024 (the “Effective Date”).
What the New Rule Entails
Up to this point, the enforceability of non-compete agreements has been solely a matter of state law. The new Rule causes a complete ban on enforcement of all “non-compete clauses” in the U.S., regardless of state law, subject to certain limited exceptions.
The Rule broadly defines a “non-compete clause” as any term or condition of employment that restricts an employee’s ability to work for a different employer or start a business after their current employment ends. This definition encompasses both written and oral agreements, extending beyond traditional non-compete clauses to potentially include certain non-disclosure and non-solicitation agreements if they significantly limit an employee’s future employment opportunities.
However, the Rule carves out exceptions for existing non-compete agreements covering “senior executives,” defined as those earning over $151,164 annually who are also in policy-making positions. However, all new employment-related non-competes, even those with senior executives, will be prohibited.
Notably, non-competes entered into as part of a bona fide sale of a business remain permissible, as far as allowed under state law, and should remain enforceable in most cases.
Notably, employers must preemptively notify employees that their non-compete clauses are unenforceable, and this notification must be made no later than the Effective Date, creating significant administrative challenges for employers as they work to come into compliance over the next few months.
The U.S. Chamber of Commerce has already filed a suit against the FTC claiming that it lacks the power to enforce this Rule, and many other legal challenges are expected. However, unless and until such challenges are successful, employers and other affected parties should begin planning their strategy to deal with the effects of the new Rule.
Effect on M&A Deal Terms
The new rule is poised to drastically alter the landscape of mergers and acquisitions (“M&A”). M&A deals often involve hiring of the prior owner and/or management team of the acquired business, and any such employment arrangement will now have to reckon with the new Rule. The preservation of non-competes in the context of business sales means these agreements could become more critical in negotiations, with Buyers asking for extended durations or broadened scopes. Deal structures may need to be reevaluated to ensure compliance while still protecting business interests.
Potential Disruption to Employers’ Businesses
The implementation of the FTC’s new rule is likely to cause significant disruption to many employers’ businesses, particularly those that have traditionally relied heavily on non-compete agreements to protect their interests.
Specifically, employers may face challenges in retaining top talent without the ability to enforce non-compete clauses. This increased mobility could lead to a more competitive environment for skilled workers, potentially driving up wages and forcing companies to invest more in employee retention efforts.
With the restrictions on non-compete agreements, employers may need to strengthen other means of protecting trade secrets and confidential business information. This could require additional resources to enhance legal safeguards and security measures. As agreements protecting trade secrets, confidential information, and certain non-solicitation agreements are still permitted, we expect that these types of agreements will become more important to employers. Having robust legal agreements in place in these areas will be critical.
Employer Compliance & Strategies
As the FTC’s new rule on noncompete agreements reshapes the employment landscape, it’s crucial for employers to understand and take necessary actions to ensure compliance. Each employer’s situation will be unique, and any approach should be reviewed by an attorney. Some of the key areas employers will need to consider include:
- Existing Agreements. Employers should work with their attorneys to conduct a thorough review of all existing employment contracts and policies to identify any terms that may be considered non-compete clauses under the new rule. This includes written and oral agreements, as well as non-disclosure and non-solicitation agreements that could function as non-competes.
- Consider New Agreements and Policies. Employers may need to revise employment contracts and policies that include non-compete clauses. Additionally, employers may be served by ensuring any revisions adequately protect trade secrets and confidential information and include enforceable non-solicitation covenants.
- Provide Notice to Employees. A critical step in compliance is the requirement for employers to provide notice to workers, excluding senior executives, who are currently bound by non-compete agreements. This notice, which can be delivered on paper or electronically, must inform employees that the non-compete agreements will not be enforced against them in the future. The notice must be provided by the effective date of the new rule, ensuring that all affected employees are aware of their rights and the changes to their employment terms. The FTC has provided form language for the notice for ease of compliance, but this language and the overall approach to notification should be reviewed by the employers’ attorneys.
- Explore Alternatives for Protecting Business Interests. With the limitation on non-compete agreements, employers should consider alternative strategies for protecting proprietary information and maintaining competitive advantage. This could include reinforcing non-disclosure agreements, enhancing security measures for confidential information, and focusing on employee retention strategies that do not rely on restrictive covenants.
Future Developments and Legal Challenges
Given the rule’s sweeping impact, legal challenges are anticipated, particularly under the “major questions” doctrine, which could delay its implementation or alter its final form. The FTC’s authority to enact such a comprehensive ban has been questioned, indicating a potentially tumultuous path ahead for the rule’s enforcement.
Frequently Asked Questions
Q1: How does the FTC’s new Rule affect Florida law regarding noncompete agreements?
A1: The FTC’s new Rule specifically supersedes state laws that allow for non-compete clauses prohibited under the new federal regulation. This means that despite Florida Statute Section 542.335, which has historically allowed for the enforceability of non-compete agreements under certain conditions, employers in Florida will no longer be able to rely on state law to enforce or enter into non-compete agreements that fall under the purview of the FTC’s new rule. It’s a significant shift that emphasizes federal authority over state law in this aspect of employment law.
Q2: When does the new FTC rule take effect?
A2: Barring any delay in publication in the Federal Register, the Rule is expected to take effect on September 4, 2024. However, potential legal challenges could affect this timeline, so it’s crucial for employers and employees alike to stay informed on any developments.
Q3: What about existing non-compete claims?
A3: The Rule does not apply retroactively to causes of action related to a non-compete clause that accrued before the Rule’s effective date. This means that enforcement actions or litigation based on non-compete agreements entered into before the effective date of the Rule may still proceed under the laws applicable at the time the agreement was made.
Q4: Who is affected by the FTC’s new rule?
A4: The Rule applies broadly to both employees and independent contractors, making it far-reaching in scope. This includes workers in all sectors, with the exception of senior executives as defined by the rule (those earning more than $151,164 annually in policy-making positions) and non-compete clauses entered into as part of the sale of a business. Essentially, the vast majority of the workforce in the United States will be affected by this rule, with significant implications for their mobility and freedom to engage in competitive employment opportunities.
Q5: What should I do if I’m currently bound by a non-compete agreement?
A5: If you’re currently bound by a non-compete agreement, it’s important to understand how the new Rule may affect your specific situation, including whether you are also bound by non-solicitation agreements and non-disclosure agreements, and whether your agreement falls into one of the permitted exceptions. Given the complexities and potential legal nuances, you should talk to an attorney for guidance tailored to your circumstances.
Q6: How should employers in Florida adjust to this new rule?
A6: Employers in Florida and elsewhere should begin reviewing their employment agreements and policies to ensure compliance with the Rule. This may involve revising non-disclosure and non-solicitation agreements, enhancing confidentiality protections, and exploring alternative mechanisms for protecting business interests without relying on non-compete clauses. Legal consultation can help navigate these changes effectively and minimize the risk of non-compliance.
Conclusion
The implications of the FTC’s new rule on non-compete agreements are vast and complex, affecting a wide range of industries and employment practices. Whether you’re an employer concerned about protecting your business interests or an employee exploring new opportunities, it’s crucial to understand how this rule could affect you.
For detailed guidance tailored to your specific situation and to stay ahead in a changing legal landscape, contact our firm today. Our team of experts is ready to provide you with the insights and support you need to navigate this new rule effectively. Call or email us for more information and let us help you prepare for the future of employment and competitive practices.
Prepared by the Corporate Law Practice Group at Rossway Swan Tierney Barry & Oliver, P.L. Please contact Kevin M. Barry or Ethan S. Moore for more information.
