****UPDATE September 6, 2024****
On August 20, 2024, in Ryan LLC v. Federal Trade Commission, the Northern District of Texas found that the FTC’s non-compete rule (discussed below) was unlawful. The Texas court found that the FTC exceeded its authority by creating the rule and that the rule was an arbitrary and capricious “categorical ban.” The court rejected the FTC’s argument that relief should be limited to the named plaintiffs, holding that the Administrative Procedure Act “does not contemplate party-specific relief.” Therefore, the Texas Court’s decision prevents the rule from taking effect nationwide. This matter will have to go through the Court of Appeals and, perhaps, to the United States Supreme Court. For now, the ban on non-competes is not valid. Contact our employment lawyers to discuss issues with your non-compete or non-solicitation agreements.
See earlier article below:
On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule to promote competition by banning non-competes nationwide. The nationwide non-compete ban protects the fundamental right of workers to change jobs, which increases innovation, and fosters new business formation. An estimated 30 million workers—nearly one in five American workers—are subject to a non-compete and will be impacted by this rule.
Key Takeaways from Federal Non-Compete Ban
- The nationwide ban will become effective in 120 days after publication in the Federal Register, which is on or about September 4, 2024 (the “effective date”).
- Existing non-competes for the vast majority of Americans will no longer be enforceable after the rule’s effective date.
- Employers will be required to provide notice to workers, except Senior Executives (as defined below), who have existing noncompetes that they will not be enforcing any noncompetes against them.
- The rule does not affect claims or violations that have accrued prior to the rule’s effective date. In other words, if a worker already violated the terms of a noncompete before the effective date, it will not prevent legal action against that worker.
- Non-solicitation clauses are likely still enforceable if the non-solicit clause is narrowly tailored and is not so overbroad as to prevent a worker from working in the same field after the conclusion of the worker’s employment. This area will be ripe for litigation.
- NDAs (non-disclosure agreements), TRAPs (training-repayment agreements), and no-hire or non-recruitment agreements will also still be enforceable unless they function to prevent a worker from seeking or accepting work or operating a business in the United States.
- There are exceptions. For example, pre-existing non-competes with “Senior Executives” are not invalidated by the final rule. Also, the rule does not apply to non-competes entered into by a person pursuant to a sale of a business entity.
When does the Nationwide Non-Compete Ban become Effective and what is next?
The effective date of the final rule is 120 days after publication in the Federal Register, which is on or about September 4, 2024. The FTC’s final rule will be subject to legal challenge. In fact, the Chamber of Commerce has announced it intends to file litigation immediately. How long it will take courts to determine whether the regulation is lawful is unknown. Expect that legal challenges to the rule may delay enforcement.
What agreements or clauses are covered by the national Non-Compete Ban?
The rule defines a “non-compete clause” as:
A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
(i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
(ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.
This broad definition covers agreements with any worker, including employees, independent contractors, volunteers, interns, or sole proprietors who provide a service to a client or customer. The rule applies broadly to any person or employer, which include a person, partnership, corporation, association, or other legal entity.
What happens with pre-existing Non-Compete Agreements?
All existing Non-Compete agreements will be effectively banned once the rule takes effect, except for workers that meet the definition of “Senior Executive.” In fact, employers are required to provide notice to all current and former workers that are bound by a non-compete. The notice must state that the employer will not enforce and non-compete clause against the employee starting on the effective date of the rule (or earlier if the employer chooses).
Who is considered a Senior Executive?
As stated, existing Non-Competes for Senior Executives are not invalidated or void. The rule defines “Senior Executive” as a worker (a) in a “policy-making position”; and (b) earning an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments). Under the rule, a “policy-making position,” is limited to a business’ president, CEO or equivalent, or any other person with “policy-making authority” for the business similar to a corporate officer with policy-making authority. Individuals that will meet this definition are likely limited.
What are the Exceptions to the Non-Compete Ban?
Every rule has exceptions. This one is no different. Here are the exceptions:
- The non-compete ban does not apply to a cause of action related to a non-compete clause that accrued prior to the September 4, 2024 effective date.
- Sale of Business. The non-compete ban does not apply to a non-compete clause entered into pursuant to sale of a business entity, of the person’s ownership interest in a business entity, or all or substantially all of business entity’s operating assets.
- The non-compete rule does not apply to a person or entity outside of the FTC’s jurisdiction. For example, true non-profits and foreign entities.
Does the Non-Compete Rule prohibit other types of restrictive agreements, such as non-solicitation and NDAs?
Non-competes are often used together with other restrictive employment agreements, including non-disclosure agreements (“NDAs”), non-solicitation agreements, TRAPs (training-repayment agreements), and non-recruitment agreements. The non-compete rule does not specifically address these types of agreements. However, the FTC’s comments states that the rule does not categorically prohibit other types of restrictive employment but also does not expressly permit them either.
The language in the rule that bans any agreement that “functions to prevent a worker” from working or opening a business after employment ends addresses this issue. Thus, if an employer adopts a term or condition that is so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, such a term is a non-compete clause under the final rule and is banned. The FTC stated that this determination is a “fact specific inquiry.”
These other restrictive agreements are likely to be the subject of future litigation and will allow the Courts of each state to shape whether these other restrictions will be enforceable.
What if there is a state law that also governs non-compete provisions?
The Non-Compete ban does not limit or affect enforcement of State laws that restrict non-competes where the State laws do not conflict with the final rule. However, the non-compete rule preempts State laws that conflict with the final rule. In other words, states can have laws that go even further in restricting non-competes or other restrictive agreements but must provide the protections of the Non-Compete rule, at minimum.
What about non-compete clauses in severance agreements or settlement agreements?
The definition of non-compete clause is not limited to clauses in written, legally enforceable contracts and applies to all forms a non-compete might take, including workplace policies or handbooks and informal contracts. Except for the noted exceptions (e.g. sale of business or pre-existing agreement with Senior Executive), the Non-Compete ban applies to all non-competes, regardless of the type of agreement. Accordingly, Non-Compete clauses in severance agreements and settlement agreements are banned and void.
If you are a business owner or worker and have questions about the FTC’s Nationwide Ban of Non-Compete Agreements, including the enforceability of certain restrictions and complying with the new law, please contact the Ohio Employment Lawyers at Mansell Law.
Mansell Law
Non-Compete Lawyers in Columbus, Ohio