On April 23, 2024, the Federal Trade Commission (“FTC”) announced its Final Non-Compete Rule (“Rule”). The Rule bans companies from entering into new non-compete agreements with all workers, nationwide, once the Rule goes into effect. Specifically, the Rule provides it is an unfair method of competition, and, therefore, a violation of Section 5 of the FTC Act, for employers to enter into non-competes with workers after the effective date.
Although the proposed Rule is broad, it is not all-encompassing. There remain two main categories of non-compete agreements that are not covered by the Rule: 1) existing non-competes with “senior executives”; and 2) non-competes in agreements covering the sale of a business.
With respect to “senior executives”, as compared to most other workers, existing non-compete agreements can remain in place, whereas existing non-competes with workers who do not qualify as a senior executive are not enforceable once the Rule goes into effect. The term “senior executive” is defined as any worker earning more than $151,164 annually who are in a “policy-making position.” Notably, the FTC estimates that fewer than 1% of all workers are senior executives under the final rule.
In the case of the sale of a business, the Rule does not apply to a non-compete clause in connection with the “bona fide sale of a business entity, of the person's ownership interest in a business entity, or of all or substantially all of a business entity's operating assets.” Likewise, the Rule sets forth a few other limited exceptions including “where a cause of action related to a non-compete clause accrued prior to the effective date”, or where the person seeking to enforce a non-compete agreement has a good-faith basis to believe that the Rule is inapplicable.
The FTC's goal is to promote competition, protect the fundamental freedom of workers to change jobs, thereby increasing innovation, and fostering new business formation. The FTC estimates that banning non-competes will result in:
- New business formation increasing by 2.7%, resulting in over 8,500 additional new businesses created each year.
- Rise in innovation with an average of 17,000-29,000 more patents each year for the next ten years.
- Higher worker earnings upwards of $400-$488 billion in increased wages for workers over the next decade.
- An increase in the average worker's earnings by $524 per year.
The Rule was published on May 7, 2024, in the Federal Register, meaning it will go into effect starting on September 4, 2024, barring a successful legal challenge.
What Should Employers Do Now?
- From a compliance standpoint, companies should review whether they have any employment agreements with current or former employees that contain non-compete provisions. If they do, the company must affirmatively provide notice to the employee (in most cases) that the non-compete agreement will not be enforced.
- Companies involved in ongoing mergers or acquisitions should take another look at the target company to determine if the target company's value may be negatively impacted by the Rule. For example, if the target company's employees have sensitive business information and they are now free to leave the company with that confidential information or trade secret given the unenforceable nature of their non-compete provisions, the value of the company may be significantly reduced.
- In order to protect their business, employers should review and, where necessary, strengthen their policies and agreements between the company and its employees to protect the company's confidential and proprietary information, including the company's trade secrets. To that end, companies should review their confidentiality and nondisclosure agreements, to reevaluate which employees are privy to sensitive and critical company information.
Companies should also consider implementing exit interviews when key employees depart the company to evaluate if the employee has any confidential information in their possession, and to remind the departing employee of their continuing obligations to the company after the employment terminates.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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