FTC Non-Compete Rule: What Employers Need to Know
The Federal Trade Commission (FTC) has issued a final rule designed to: (1) promote competition, (2) spur innovation, (3) encourage new business formation, and (4) protect workers’ rights to change jobs. This rule is grounded in the FTC’s mandate to prevent unfair competition, as outlined in Section 5 of the Federal Trade Commission Act (FTC Act).
After numerous legal challenges to the Rule, on August 20, 2024, the U.S. District Court for the Northern District of Texas set aside the Rule on a nationwide basis. Now that there is a nationwide judicial ruling, the Rule will not go into effect on its original effective date of September 4, and the status quo regarding non-competes in Kentucky remains. However, since this is not a final decision, it is still helpful to review the Rule and what it could mean for compliance with these types of agreements.
What Does This Mean for Employers?
The final rule prohibits employers from entering into new non-compete agreements with workers (employees or independent contractors). Additionally, it restricts the enforcement of existing non-compete agreements for most workers, with the exception of certain senior executives.
While the rule includes an exception for "senior executives" who earn more than $151,164 annually and hold policy-making positions, this exception is estimated to apply to fewer than 1% of workers. Importantly, this exception does not allow employers to enter into new non-compete agreements with senior executives after the effective date.
The rule does not prohibit employers from enforcing non-compete clauses where the cause of action related to the clause accrued before the rule's effective date. Additionally, the rule clarifies that it is not an unfair method of competition to enforce or attempt to enforce a non-compete, or to make representations about a non-compete, where the employer has a good-faith basis to believe that the rule is inapplicable.
Additionally, employers would also be required to notify workers, current and former, who are subject to non-competes that those are no longer enforceable, informing them these agreements are now void and will not be enforced. We suggest you would consult with your attorney for assistance if this becomes necessary.
Suggested Steps for Compliance
As good business practice and to ensure you are prepared to be in compliance with the new rule if it does go into effect in the future, employers should:
Review Existing Agreements: Assess all current non-compete to determine which will be affected.
Identify Affected Employees: Create a list of employees (current and former) whose agreements will need to be nullified.
Pursue Alternative Protections: If you do not already have in place with necessary employees non-disclosure, non-solicitation, and/or confidentiality protections regarding your business information it is a good idea to ensure that you provide for such protections going forward so that employees may not use your entity’s information.
Legal Risks
Non-compliance with the new FTC rule could result in significant legal risks, including potential penalties and litigation. Employers are advised to be prepared in order to mitigate these risks.
Interaction with State Laws
The final rule would supersede all state laws to the extent, and only to the extent, that a state’s laws permit or authorize conduct prohibited under the final rule or conflict with the rule’s notice requirements. Employers operating in multiple states should pay particular attention to how these laws overlap or differ.
Considering a Business Acquisition?
The new rule does not prevent the inclusion of non-compete clauses in agreements between buyers and sellers of businesses.
Alternative Protections
Businesses seeking to protect themselves from the risks of employees leaving should consider trade secret and proprietary protections. To accomplish this, businesses must review which employees have access to trade secret and/or proprietary information, whether they need to know that information, and what information needs to be protected. Often, strict confidentiality and non-disclosure agreements will provide adequate protection, but it is important to consult with an attorney to discuss your business’s individual needs.
Additionally, non-solicitation agreements may achieve similar goals to those of a non-compete agreements, helping to protect your business’s employees from being siphoned off to a competitor.
Pending Litigation—Legality of the Rule
The FTC could appeal the District Court’s ruling to the U.S. Court of Appeals for the Fifth Circuit, and the case could eventually make its way to the U.S. Supreme Court as well. The safest course of action is to ensure you have reviewed existing agreements and identified effected employees, so you have the information you need to comply with any future rulings.
Support from Sturgill Turner
At Sturgill Turner, we are here to support you. Our services include employment law, intellectual property, business transactions and more! Don’t hesitate to contact your attorney or either of the attorneys below with any questions specific to your business needs. Be sure to check our website for more information and updates as they become available.
Derrick T. Wright - employment and municipal law. He can be reached at dwright@sturgillturner.com or (859) 255-8581.
Jay L. Phillips - business and intellectual property law. jphillips@sturgillturner.com or (859) 255-8581.
This article is intended as a summary of state and/or federal law and does not constitute legal advice.
Updated August 21, 2024, 1:55 p.m.