New FTC Rule Bans Non-Compete Agreements

APRIL 25, 2024

By: Ryan Bradley Champaign, IL rbradley@heylroyster.com

The new FTC rule, a significant development in the legal landscape, was passed on April 23, 2024. This Rule effectively bans non-compete agreements across all industries. The decision was made after the five FTC Commissioners voted 3-to-2 to adopt the proposed Rule, which the agency initially promulgated in January 2023. After receiving feedback from an estimated 26,000 public comments, the FTC has set the new Rule to take effect 120 days after it is published officially in the Federal Register.

According to the official Fact Sheet promulgated by the FTC:

• The Rule bans new non-competes with all workers, including senior executives, after the effective date.
• For existing non-competes, the Rule differentiates between senior executives and other workers. 
• Senior executives with existing non-competes will still be bound to the terms of their non-compete agreements.
• After the Rule becomes effective, workers other than senior executives will be released from the restrictions of their existing non-competes. The Rule defines the term "senior executive" as workers earning more than $151,164 annually who are in a "policy-making position."

The FTC estimates that non-compete agreements currently cover 30 million workers, or roughly 18% of the American workforce. Accordingly, most businesses must thoroughly review existing employment agreements, particularly those that currently include non-compete provisions. 

The Rule derives its authority from Section 5 of the FTC Act and provides that it is an unfair method of competition to:

• Enter into or attempt to enter into a non-compete clause with a worker
• Maintain with a worker a non-compete clause or
• Represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe the worker is subject to an enforceable non-compete clause.

The Rule appears to affirm the use of non-disclosure agreements and contractual language to protect trade and business secrets. Additionally, the Rule has streamlined its application by removing the formal "recission" process included in the Proposed Rule.

To comply with the Rule, employers must provide "clear and conspicuous notice to the worker by the effective date that the worker's non-compete clause will not be, and cannot legally be, enforced against the worker." The Rule includes detailed model language that employers can use to fulfill this notice requirement and qualify for safe harbor under the Rule.

There are a few exceptions to the Rule's applicability. These include the genuine sale of a business and the continuation of causes of action currently filed to enforce existing non-compete agreements. If a company is a not-for-profit organization, such as a 501(c)(3) organization, and is not organized to carry on business for its profit, the Rule does not apply to it. This is because the FTC only has jurisdiction over for-profit companies. In the healthcare sector, the Rule does not apply to most hospitals in the country since they are nonprofits. However, this exclusion has an exception. If a tax-exempt company is "organized in a way that seeks to drive profits to its members," the FTC may be able to treat the company as for-profit, including cases where nonprofit hospitals have relationships with for-profit physician practices.

Business industry organizations such as the Chamber of Commerce are actively opposing the Rule, and legal challenges are forthcoming. These legal challenges may alter the Rule's application or eliminate it entirely. The US Chamber of Commerce and Business Roundtable has filed suit in federal court in the Eastern District of Texas to block the Rule's enactment.

Key Takeaways for Businesses:

• While litigation may block the final application of the Rule, any business that has or plans to use non-compete agreements to protect its operations should immediately review its contracts with the assistance of legal counsel.
• Businesses should begin to prepare notices to employees impacted by the Rule using the model language provided in the Rule.
• Businesses should begin analyzing the status of employees who may be considered "senior executives" and determining the applicability of this designation based on their policy-making roles and salaries.
• All employment agreements with applicable employees should be reviewed, paying attention to non-compete, non-disclosure, and trade secret provisions, as these provisions will be the primary means of protection under the new Rule.

The Employment & Labor Law, Business Organizations & Transactions, and Business & Commercial Litigation teams at Heyl Royster are continually monitoring the impact of the Rule and the litigation challenging its application. We are ready to review existing employment agreements for our clients and assisting drafting new ones as this important area of law develops.