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The Federal Trade Commission’s New Final Rule Regarding Non-Compete Agreements and Their Impact on Employers and Employees
Author: Alexandra Noyes
Following the adoption of the FTC’s new “final rule” concerning non-compete agreements, questions have been swirling through the media and the public at large. The final rule was issued “to promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”[i]
The FTC’s Chair, Lina M. Khan, stated, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.”[ii] She added, “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”[iii]
The rule is set to go into effect on September 4, 2024. The final rule bans new non-competes with all workers, including senior executives. after the effective date. “Specifically, the final 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.”[iv] For existing non-competes, the final rule adopts a different approach. For senior executives, existing non-competes can remain in force. “Existing non-competes with workers other than senior executives are not enforceable after the effective date of the final rule.”[v]
The final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually who are in a “policy-making position.”[vi] “The rule also requires that employers, by the rule’s effective date, provide written notice to each worker (other than qualifying senior executives) subject to a non-compete restriction that the non-compete provision will not be enforced against the employee.”[vii] The rule provides model notice language.
It was also argued that, “for nonunion workers, the only leverage they have is their ability to quit their job,” and that “[n]on-competes don’t just stop you from taking a job—they stop you from starting your own business.”[viii] This potentially threatens those seeking to start a new business if they are subject to unionized wage agreements and/or have a limited employee pool. Could this new rule backfire? The Commission does not believe so, but only time will tell as the rule is implemented.
Other Exceptions to the “Final” Rule
In addition to the “senior executive” exception, non-compete clauses entered as part of a franchisor-franchisee relationship, as well as between a buyer and a seller as part of a bona fide sale of a business are also exempt from the FTC’s final rule.[ix] The rule will also have no effect on lawsuits involving non-compete claims filed before the final rule’s effective date.
What Does This Mean for Employers?
The FTC “found that employers have several alternatives to non-competes that still enable firms to protect their investments without having to enforce a non-compete. Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information.”[x] But will these suffice in truly protecting proprietary information? California businesses, for instance, can almost always use an NDA to protect their trade secrets. However, there are numerous situations in which an NDA may be deemed unenforceable. Therefore, businesses do not feel fully protected by such agreements. Further, NDAs have become the norm and are overused in a variety of situations.
California courts will not enforce an NDA if the information it seeks to protect is of concern to the public, or important to preserving public safety, public health or government transparency. NDAs cannot be used to keep any illegal activity confidential, and at times, whether illegal activity is involved may be a question of fact.[xi]
An NDA also can be challenged or invalidated by the courts if its drafted language is vague, ambiguous, or unreasonably broad in scope or burdensome. NDAs that are oppressive, overreaching in scope and seen as an attempt to protect irrelevant information can also be invalidated by the courts.[xii] So, will these NDAs provide the full protection needed to protect all proprietary information and treasured trade secrets?
At this time, several legal challenges have been filed in various federal courts and will delay the enforcement of the rule. “Two cases, Ryan LLC v. FTC[xiii] and Chamber of Commerce of the United States of America et al. v. FTC[xiv] argue that the FTC lacks the authority to adopt rules banning conduct it deems to be an ‘unfair method of competition’ under Section 5 of the Act.”[xv] “They also argue that the rule violates federal agency rulemaking law because the FTC failed to consider narrower limitations of non-competes. If the Ryan court grants the Motion for Stay of Effective Date and Preliminary Injunction, a nationwide injunction could stay the implementation of the rule.”[xvi]
Important Takeaways
At this time, employers can continue to enforce non-compete agreements and may include them in contracts. Employers should closely follow the Ryan case and remain vigilant, ready, and aware. If the new rule is not successfully challenged in the courts, employers will be forced to prepare for the implementation of the new rule.
The best action to take is to review existing contracts and think of alternative solutions and replacements to your existing and future non-compete agreements. Drafting and perfecting an iron-clad NDA and other confidentiality agreements may be beneficial in avoiding issues of unenforceability in the future. Consulting with legal counsel is also advisable.
Sources
[i] Federal Trade Commission, “FTC Announces Rule Banning Noncompetes” (April 23, 2024),? https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes
[ii] ?Id.
[iii] ?Id.
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[iv] ?Id.
[v] Federal Trade Commission, “Fact Sheet on FTC’s Proposed Final Noncompete Rule” (April 23, 2024),
[vi] Federal Trade Commission, “Fact Sheet on FTC’s Proposed Final Noncompete Rule” (April 23, 2024),
[vii] Eugenia H. Donahoo, Sarah B. Purpura, Robert G. Reigel, Jr. “What Employers Need to Know About the FTC’s Ban of Non-Competition Agreements” (May 23, 2024), https://www.lippes.com/insights/what-employers-need-to-know-about-the-ftc-s-ban-of-non-competition-agreements-2619
[viii] Kate Gibson, “FTC bans noncompete agreements, making it easier for workers to quit. Here’s what to know.” (April 24, 2024), https://www.cbsnews.com/news/ftc-noncompete-agreement-ban/
[ix] Eugenia H. Donahoo, Sarah B. Purpura, Robert G. Reigel, Jr. “What Employers Need to Know About the FTC’s Ban of Non-Competition Agreements” (May 23, 2024), https://www.lippes.com/insights/what-employers-need-to-know-about-the-ftc-s-ban-of-non-competition-agreements-2619
[x] Federal Trade Commission, “FTC Announces Rule Banning Noncompetes” (April 23, 2024),? https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes
[xi] Ramon Berenguer, Human Resources Director, “Confidentiality agreement vs. NDA: main points and differences” (September 23, 2023) https://www.hcamag.com/us/specialization/employment-law/confidentiality-agreement-vs-nda-main-points-and-differences/459490#:~:text=An%20NDA%20can%20be%20challenged,and%20be%20invalidated%20by%20courts
[xii] Id.
[xiii] Ryan LLC et al v. Federal Trade Commission, No. 3:24-CV-00986-E, U.S. Dist. Ct., N.D. Tex.
[xiv] Chamber of Commerce of the United States of America et al. v. Federal Trade Commission et al., No. 6:24-cv-00148, U.S. Dist. Ct., E.D. Tex.
[xv] Eugenia H. Donahoo, Sarah B. Purpura, Robert G. Reigel, Jr. “What Employers Need to Know About the FTC’s Ban of Non-Competition Agreements” (May 23, 2024), https://www.lippes.com/insights/what-employers-need-to-know-about-the-ftc-s-ban-of-non-competition-agreements-2619
[xvi] ?Id.
View this article on the Tyson & Mendes website here: https://www.tysonmendes.com/breaking-the-chains-or-handing-them-the-keys-the-federal-trade-commissions-new-final-rule-regarding-non-compete-agreements-and-their-impact-on-employers-and-employees/
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