On April 23, 2024, the Federal Trade Commission (“FTC”) issued a Final Rule prohibiting the use of non-compete agreements for most of the American workforce. While the Final Rule will not go into effect until 120 days after its publication in the Federal Register, and is already being challenged in the courts, the Rule has major ramifications for employers across the country.
Non-Competes Generally
Non-competition or non-compete clauses are contractual agreements that restrict an employee’s future employment opportunities in a certain industry, in certain roles, and/or with certain competitors. In Kentucky, the courts have enforced non-compete agreements so long as their purpose was to “prevent unfair competition by the employee or his subsequent employer, and the restraint of trade [was] no greater than reasonably necessary to secure the protection.” Crowell v. Woodruff, 245 S.W.2d 447, 449 (Ky. 1952). In recent years, however, non-compete agreements have come under increasing scrutiny from courts and from various regulatory agencies.
FTC’s Final Rule
In January 2023, the FTC announced a Proposed Rule that would prohibit non-compete agreements for most “workers,” defined to include employees and independent contractors. After an extended notice and comment period, the FTC issued its Final Rule on April 23, 2024.
The Final Rule does the following:
- It prohibits employers from entering into new non-competes with all workers after its effective date.
- With respect to pre-existing non-compete agreements, it prohibits employers from enforcing them for all workers except for “senior executives,” i.e., those employees that make more than $151,164.00 per year and who are in “policy making position[s].”
- The Final Rule requires employers to notify workers whose non-competes are no longer enforceable that the agreements are no longer in effect and will not be enforced. The notice must be “clear and conspicuous” and must be in written form and delivered by hand, mail, email, or text message. The rule provides model language for employers to use.
- The Final Rule exempts bona fide non-compete agreements that are entered into by a seller as part of the sale of a business entity or the seller’s ownership interest in a business entity.
- The Final Rule also exempts non-compete agreements that are entered into between franchisors and franchisees, but it does not exempt non-compete agreements entered into between franchisors or franchisees and their respective workers.
The Final Rule “supersede[s],” or preempts, all state law regarding non-competes that are inconsistent with the requirements imposed by the Final Rule. As such, if the Final Rule survives the various court challenges, the states would only be able to impose restrictions on non-compete agreements that are greater than those provided by the Final Rule.
The Final Rule applies to any person or employer that falls within the FTC’s jurisdiction, which effectively includes most for-profit businesses. However, it is important to note that Section 5 of the FTC Act, upon which the FTC relied in implement the Final Rule, does not cover banks, federal credit unions, air carriers, common carriers, meatpackers, and poultry dealers.
Challenges to the FTC’s Final Rule
When the FTC first announced its Proposed Rule in January 2023, legal challenges were anticipated and, sure enough, almost immediately the issuance of the Final Rule several lawsuits were filed in federal courts in Texas. The primary argument in the lawsuits is that the FTC exceeded its authority under Section 5, that only Congress has the authority to legislate. The lawsuits also challenge the constitutionality of the FTC Act itself, claiming that it improperly interferes with the President’s right to remove FTC Commissioners.
An injunction staying the implementation of the Final Rule is likely, as are more legal challenges. In addition, given the constitutional implications, the cases are likely to reach the Supreme Court.
What Should Employees and Employers Do?
While the litigation is pending, the status quo remains. Neither employers nor employees should assume pre-existing non-competes are enforceable. Indeed, employees subject to a non-compete who are contemplating other professional opportunities, either with a competitor or within the same industry, are encouraged to seek competent legal counsel experienced with antitrust and competition issues.
Due to the regulatory uncertainty regarding non-compete agreements, and the wave of state-level legislation in recent years that has restricted the use of non-compete agreements in one way or another, employers are encouraged to consider other ways to protect their legitimate business interests. Employers can continue to do so through contractual means, such as with non-solicitation agreements and non-disclosure agreements. Employers can also do so through market-competitive means, such as with competitive wages, competitive benefits packages, and other rewards that incentive employee loyalty, such as with certain kinds of bonuses, deferred compensation plans, and even focused attention on company culture. Regardless, the importance of legal review of non-compete restrictions to ensure they narrowly protect legitimate business interests cannot be overstated.
We are closely monitoring all legal developments and will provide updates every step of the way. If you have any questions, connect with us today.
