Update to FTC’s Proposed Rule that would Ban Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (FTC) announced the final rendition of its proposed rule that would invalidate almost all non-compete agreements or clauses used by employers as well as any other restrictive agreements that “function” as non-compete agreements. This proposed rule is set to become effective on September 4, 2024 if it survives current legal challenges.

The proposed rule would prohibit any contractual term between an “employer” and “worker” that prevents the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. This proposed rule would supersede all state law on the subject. The FTC does not have authority over banks, federal credit unions, air carriers, common carriers, meatpackers, and poultry dealers. Those industries are exempt from the proposed rule, but almost all other hired relationships will be covered.

The proposed rule is extremely broad and would apply in almost all circumstances that a non-compete or similar restrictive agreement is used.

Along with banning all future use of non-compete or similar agreements, the proposed rule would also invalidate all non-compete agreements previously signed. The proposed rule requires that within 180 days of the final rule going into effect, which would be no later than January 28, 2025, all employers send an individualized communication to all parties that the employer has entered into a non-compete or similar agreement within the past. The communication must inform the party that their non-compete or similar restrictive agreement is no longer valid.

The proposed rule carves out a few exceptions to which the ban on non-competes does not apply. Those are:

1. Existing non-competes with "senior executives" are grandfathered in and remain enforceable. However, after the proposed rule becomes effective, any future non-competes with “senior executives” are invalid. To qualify for this exception, a "senior executive" must have received at least $151,164.00 in total annualized compensation in the preceding year and hold a "policy-making position.”

2. Non-competes entered into pursuant to a bona fide sale of a business entity, of a person's ownership interest in a business entity, or of all or substantially all of a business entity's operating assets are not banned by the rule.

3. The proposed rule does not preclude enforcement of non-competes where the cause of action accrued prior to the rule’s effective date. This means that if there is a current lawsuit attempting to enforce a non-compete, the employer can continue to pursue enforcement of that non-compete.

4. The rule includes a "good-faith" exception, where it is permissible for an employer to "enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that the non-compete in question falls within one of the exceptions.”

At the moment, the proposed rule is being contested in two notable lawsuits. On July 3, 2024 a Texas Federal Court held that the proposed rule cannot be enforced against the business that filed the lawsuit while they consider whether the FTC had the authority to introduce this rule at all. This ruling, however, means that the proposed rule would still apply to all other businesses within the FTC’s jurisdiction while the court is considering that question. That court has stated that it will issue a decision on whether the FTC has the required authority to introduce the rule, essentially striking down or upholding the proposed rule, by August 30, 2024.

Additionally, a court in Pennsylvania recently ruled differently than the Texas court, stating that it would not suspend the enforcement of the FTC’s proposed rule. Regardless of how that Texas court rules, that likely will not be the end of the legal challenges as either party could appeal. There are also other cases pending. As shown by the differing decisions in the Pennsylvania and Texas courts, this issue is ripe for more litigation.

As it stands there is a chance that the proposed rule does become law and to best prepare for this, employers should:

1. Review all non-compete and restrictive agreements that they use to determine if they will be wiped out by this proposed rule, if adopted;

2. Compile a list of all their current and former employees who have signed non-compete agreements or other restrictive agreements that would be invalidated by the proposed rule so they can be prepared to send notices on or before January 28, 2025; and

3. Consider whether to begin drafting new contractual terms for current and/or future employees that are narrowly tailored and would be enforceable under this proposed rule but still protect the trade secrets, confidential information, customer goodwill, or other business interests of the employer.

We will continue to monitor developments regarding this proposed rule and provide updates. If you have any questions about the proposed rule, what the proposed rule requires of employers to comply, the validity of your other restrictive agreements, or want help in drafting restrictive agreements that will protect your business’ interests under the proposed rule, reach out to one of the employment law attorneys at Blethen Berens.