Litigation Likely to Follow New FTC Non-Compete Regulation: What Employers and Employees Need to Know

On April 23rd, 2024, the Federal Trade Commission issued a final rule that will ban most new non-compete clauses and extinguish the vast majority of existing non-competes. The Rule will become effective 120 days after its publication in the Federal Register, which is scheduled on May 7th, 2024. Although the Courts could step in and stop it from going into effect, what are some of the potential consequences for employes and employers with non-competes in their contracts?

The FTC Non-Compete Clause Rule

The FTC’s new “Non-Compete Clause Rule” declares non-compete clauses an unfair method of competition under section 5 of the Federal Trade Commission Act. After the effective date of the Rule, with few exceptions, employers cannot enter into a non-compete clause with any employee and existing non-compete clauses cannot be enforced. When the Rule goes into effect, employers will be required to notify, in writing, all employees covered by the Rule that their non-compete clauses cannot legally be enforced.

There are a few exceptions. All of these are new ground in the law, and exactly when they apply will need to be decided by the Courts.

• Senior Executives: Existing non-compete clauses can be enforced against “senior executives.” The Rule defines a senior executive as a person in a policy-making position for a business entity, with authority to make decisions controlling a significant aspect of the business entity, that earns over $151,164 in total annual compensation.
• Bona Fide Sales of Businesses: When two independent parties agree to sell each other part of a business, they may enter into a non-compete clause, as long as the seller has a reasonable opportunity to negotiate the terms of the sale.
• Existing Causes of Action: The Rule’s requirements expressly “do not apply where a cause of action related to a non-compete clause accrued prior to the effective date” of the Rule.
• Good-faith Belief the Rule Is Inapplicable: While the Rule seeks to prevent frivolous lawsuits manufactured to suppress competition, the Rule recognizes that some attempts to enforce a non-compete agreement may be protected by the First Amendment. In some cases, attempting to enforce, or filing a lawsuit to enforce, a non-compete clause where there is a good-faith basis to believe that the Rule does not apply does not run afoul of the Rule.
• Only Applies to Certain Industries: For example, banks, non-profit organizations, and municipal corporations are exempt from FTC rulemaking. The Rule will likely not apply to those entities.

What’s Next?

Legal challenges to the FTC Non-Compete Clause Rule are expected, and may delay the rule while challenges in court are ongoing. The U.S. Chamber of Commerce has already sued the FTC. It remains to be seen how successful those cases will be.

?If you have a non-compete clause in your employment agreement, contact Miller Law today.

We have extensive experience litigating business matters in both state and federal courts throughout the country. We represent both employees and businesses of all types and sizes, and we can help you too.