FTC FINALIZES RULE ON NONCOMPETE AGREEMENTS
On April 23, 2024, the United States Federal Trade Commission (“FTC”) finalized a widely anticipated rule governing the use of noncompete agreements in the workplace for any worker in the United States, regardless of industry, title, job function, or compensation. The Final Rule applies to anyone who works, paid or unpaid, for a for-profit employer and to independent contractors and it bans new non-competes with all workers, including senior executives, after the effective date, which is 120 days from publication in the Federal Register.
In the proposed rule, the FTC suggested an exception for certain non-competes between the seller and the buyer of a business that applied only to a substantial owner, member, or partner, defined as an owner, member, or partner with at least 25% ownership interest in the business entity being sold. However, based on comments received from interested parties, the FTC adopted a final rule that provides an exception for the bona fide sale of a business without requiring that the seller have at least a 25% ownership interest, ultimately allowing non-competes in the sale of a business.
Many groups that provided comments to the FTC were also concerned about the retroactive nature of the proposed rule, which would not only ban all non-compete agreements once finalized but also void any noncompete agreements already in effect. For existing non-competes, the final rule adopts a different approach for senior executives than other workers. For senior executives, existing non-competes can remain in force. Senior executive means a person in a “policy making position” who was paid more than $151,164 in the prior year.
Existing non-competes with workers other than senior executives are not enforceable after the final rule’s effective date, which is set for 120 days after the final rule is published in the Federal Register, roughly Labor Day 2024.
According to the language in the final rule, all non-senior executives and employees who are now subject to a noncompete must be given a written notice by the effective date, stating that their non-competes are no longer in effect and will not be enforced. The Rule contains model language for the notice.
Although the FTC made some concessions based on the comments that they received, business groups are preparing to challenge the rule in the courts, which will likely delay implementation. Several of the groups that provided comments stated that, among other things, the FTC lacks the authority to promulgate the rule. These comments have laid the groundwork for not only a possible court challenge but it is also possible that lawmakers in Congress will view the rule as going too far and seek to address it via legislation.
Just hours after the FTC issued the Final Rule, Ryan, LLC, a global tax services firm, filed the first lawsuit against the FTC in the United States District Court for the Northern District of Texas. Ryan alleges that it will be seriously and irreparably harmed by the implementation of the Noncompete Rule, and asks for a judicial declaration that the Noncompete Rule violates the Administrative Procedure Act and Article II of the U.S. Constitution. The following day, the Chamber of Commerce filed a lawsuit seeking declaratory and injunctive relief in the United States District Court for the Eastern District of Texas asserting similar allegations contesting the validity of the Final Rule. The Chamber’s lawsuit includes a request for a permanent injunction on enforcement of the Final Rule and a delay of the effective date and implementation pending the conclusion of the case.
If a court issues a stay, temporary restraining order, or preliminary injunction, the implementation of the rule would be delayed while the challenge to its validity is litigated. But, unless and until a nationwide stay or other relief is granted, employers should plan to comply by the effective date, and thereafter should remain vigilant for further legal developments. Given other cases pending before the US Supreme Court that challenge the legal implication of a federal agency’s rule-making authority, the outcome of those cases also may decide the effect of the FTC’s Noncompete Rule.
Most businesses will wait to see if any of these challenges or delays occur. Once there is a final determination on the future of the new rule, then companies will have to move forward accordingly. As a business, monitoring and waiting for clarification before acting is best. Also, since the new non-compete rule does not control non-solicitation, it may be an excellent time to see if a non-solicitation will work for your business.
While legal challenges against the Final Rule play out, employers should review their existing noncompete agreements with counsel to ensure compliance and to keep abreast of new developments. Moreover, employers should assess whether their business interests can be protected by agreements covering non-disclosure and confidentiality of employer information, non-interference, and non-solicitation of customers and employees.
Employers should also ensure that all company trade secrets are properly safeguarded, shared with only those who have a business need to know, and are properly secured to ensure their secrecy. If an employer’s handbook contains a noncompete policy, the handbook should be reviewed to determine if changes must be made and whether notice should be given as provided in the Final Rule.