After a year of uncertainty, the FTC has issued a Final Rule banning employment non-competes nationwide. The Commission has determined that non-competes themselves constitute an unfair method of competition in violation of Section 5 of the FTC Act. Citing to wage suppression, stifling innovation, and inhibiting start-up creation as factors, the FTC’s sweeping Rule is a game changer for many businesses in the United States that previously relied on non-competes as a mechanism to protect business information and processes.
Under the new Rule, all non-competes, even those which pre-date the effective date of the Rule, are invalidated, with the exception of existing non-competes for senior executives (defined as workers earning total annual compensation of at least $151,164 and who are in policy-making positions, such as the President, CEO, or a similar position with final authority to make significant policy decisions for an entity). Additionally, prior to the effective date of the Rule, employers will be required to provide notice to workers who are bound by an existing non-compete advising that the employer will not be enforcing the non-compete.
The final Rule defines a “non-compete clause” 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.” The Rule applies broadly to all employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service. At the current time, it appears that non-disclosure agreements and non-solicitation agreements that are narrowly tailored so as not to prohibit, penalize, or prevent a worker from taking a new job or starting a new business are still considered legally valid, subject to state laws governing those types of agreements. Although the Rule preempts any state non-competition laws that conflict with the rule, non-conflicting state laws remain valid.
Some notable exceptions to the ban, in addition to the grandfathering in of existing provisions with senior executives, include non-competition agreements entered into in connection with the bona fide sale of a business entity or of an individual’s interest in a business entity and non-competition agreements entered into in connection with the franchisor-franchisee relationship.
The Rule will become effective 120 days after publication in the Federal Register. Legal challenges are expected to begin immediately, which may delay or ultimately result in invalidation of the Rule. However, at this point, employers should continue to follow developments on this closely to ensure that the required notice to employees with existing non-competition agreements is timely provided and to also ensure the Rule is not breached by entering into new agreements in violation of the Rule. The FTC has provided model notice language for employers to use to notify employees that existing restrictions will not be enforced. The Rule and model notice language can be found here. We will continue to monitor the status of the implementation of the Rule and are available to assist clients navigate this historic change.
