What is the New FTC Rule on Non-Compete Agreements?

The Federal Trade Commission released a final rule banning employers from creating non-compete agreements in employee contracts. Specifically, employers must not enter into, enforce, or attempt to enforce post-employment non-compete clauses with their workers. However, a business lawyer in Brooklyn highlights that the law provides limited exceptions to the ban.

The FTC issued the ban on April 23, 2024, after a review and comment period on its notice of proposed rulemaking. The rule applies retroactively and extends to all workers, including independent contractors. However, the ban may present several legal challenges, and many businesses may seek counsel and solutions from legal experts.

What Are the Primary Components of the Final Rule?

The FTC rule defines a non-compete clause as a term of employment that prohibits an employer from penalizing, restricting, or functioning to prevent a worker from seeking employment with a different employer after an employment contract ends. A former employee should also not be prohibited from starting a business in the US after their employment contract ends with a former employer..

A Brooklyn employment law attorney points out that part of the ban on non-competes declares that any entity under its authority that engages in unfair competition violates Section 5 of the FTC Act if it does the following regarding its workers:

  • Creates or attempts to create a non-compete clause
  • Enforces or tries to enforce such a clause
  • Insinuates that an employee is subject to a non-compete clause

Definition of Terms

The notice clarifies that a non-compete could be a written or oral contractual term or workplace policy. Other crucial definitions in the notice are the following:

  • Workers: Non-competes affect employees, independent contractors, sole proprietors who provide services to a person, interns, apprentices, volunteers, and natural persons working for a franchisee or franchisor
  • Senior executive: A worker in a policy-making position who had earned a minimum of $151,100 in the preceding year. A person in a policy-making position could be a business entity’s chief executive, president, or any officer with policy-making authority.
  • Policy-making authority: The FTC non-compete ban notice defines policy-making authority as the final authority to make policy-related decisions to control an entity’s crucial business aspects. The authority doesn’t include authority limited to advising on or exerting influence over policies.

Notification to Affected Workers

An employment law lawyer in Brooklyn states that the FTC notice requires any covered business entity to notify workers affected by non-compete agreements by the rule’s effective date. It should be made clear to these workers, apart from senior executives, that the non-competes can’t and won’t be enforced. Employers can provide the notices on paper, by email, or by text.

Model Languages

The following model languages can be used when notifying workers about FTC’s non-compete rule:

  • English
  • Arabic
  • Korean
  • Spanish
  • Vietnamese
  • Simplified Chinese

Are There Exceptions to the Non-Compete Agreements Ban?

FTC’s non-compete agreement ban encompasses limited exceptions and doesn’t apply to:

  • Non-competes created in connection to a bona fide sale of a business entity or
  • Causes of action that were already in existence before the rule’s effective date
  • Preempt state laws, except to the extent that such laws allow conduct that appears to be unfair competition under the final rule
  • Industries over which the FTC doesn’t have statutory authority, such as savings and loan institutions, non-profits, federal credit unions, and banks.

The ban also has a good faith exception providing that enforcing or attempting to enforce a non-compete clause or make representations about non-compete clauses is not an unfair competition method. However, the person implementing or trying to enforce the clause should have a good faith basis to believe that the rule is inapplicable.

What Is the Effect of the Ban on Trade Secret Protections?

Non-compete agreements have been unenforceable in certain jurisdictions for many years. However, the nationwide ban by the FTC raises significant concerns about IP theft. Where non-compete agreements have been enforceable, they have provided some form of deterrent to trade secret misappropriation.

Without the agreements, employers will face an increased risk that their trade secrets will be misused and make their way into the hands of competitors. The ban puts companies in a position to start taking steps to mitigate the heightened risk associated with the prohibition on non-compete agreements.

An example would be for business entities to consider drafting non-disclosure and non-solicitation agreements to provide special protections against flagrant theft and trade secrets disclosure.

Litigation Challenging FTC’s Final Rule

Within a few days of the FTC’s notice, a few parties filed federal lawsuits challenging the rule. Some specific aspects of the challenges focus on the extent of the FTC’s rulemaking authority. Motions for a preliminary injunction to invalidate the final rule and another to stay its effective date have already been filed.

Many more lawsuits are likely to challenge the final rule’s enforceability in the coming weeks. A successful litigation would invalidate the final rule in its entirety. For more legal insights on whether your business can file a lawsuit based on the non-compete agreement ban, consult a skilled Brooklyn employment law lawyer.

A Skilled Business Lawyer Providing Insights on FTC’s Non-Compete Ban

If your business has an existing non-compete agreement, consult an experienced business attorney in Brooklyn to evaluate how the FTC ban could affect you. The ban’s impact may not be felt until several months later, but it’s crucial to take proactive steps as early as now with the help of qualified legal experts.

The Law Office of Vincent Miletti, Esq., has a knowledgeable employment law attorney in Brooklyn who can review your business agreements. Our legal team can also address your concerns about the ban on non-compete agreements to protect your business interests. Please send us an email at vmiletti@milettilaw.com or call us at 314-648-2586 to schedule a case assessment.