Non-Compete Agreements FTC Ruling – How It Impacts Your Business

The Federal Trade Commission (FTC) recently announced a final rule banning the majority of non-competition agreements, and you may be wondering if and how this change will impact your business. This alert is intended to be a general summary of what to expect with the final Rule and to give the broad strokes of who may or may not be impacted. This simplified summary should not be relied upon alone to determine what responsibilities your company has under the FTC’s new rule.

What is the rule?

The Rule defines non-competition agreements as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” 

This definition does not include non-solicitation clauses that prevent employees from poaching clients and coworkers, non-disclosure agreements (NDAs), or training repayment agreement provisions (TRAPs). However, the FTC rule would apply if a non-solicitation agreement, NDA, or TRAP is so onerous or overbroad as to function as a non-compete. One example the FTC gave of a functional non-compete was an NDA  preventing  employees from using anything they learned on the job at future jobs, even publicly available information. 

The Rule is also limited to post-employment restraints and does not apply to clauses preventing employees from working concurrently for another company.

With one exception, the Rule bans all non-competition agreements on its effective date, including non-competition agreements signed before the Rule’s effective date. The Rule does make an exception for existing non-competing agreements signed by “senior executives,” defined as persons earning more than $151,165 in a “policy-making position”. All other non-competition agreements will be unenforceable after the Rule’s effective date. 

By the date the rule goes into effect, employers must notify workers bound by expiring non-competition agreements that these agreements are no longer enforceable. The Rule includes model language for this announcement. 

The Rule does not apply to non-competes that are part of a bona fide sale of a business entity.

The rule does not preclude causes of action for breaches of non-competition agreements that accrue before the effective date of the Rule.

There is a safe-haven in the rule for companies that enforce or attempt to enforce a non-compete when the business has a good-faith belief that the final rule is inapplicable.

The final rule preempts state laws that conflict with the FTC rule but does not pre-empt state laws that do not conflict with the FTC rule.  

Who does the rule impact?

Corporations that are “organized to carry on business for its own profit or that of its members” are within the FTC’s jurisdiction unless one of the  exemptions listed below applies. This means that non-profit organizations generally are outside the FTC’s jurisdiction. However, claiming 501(c)(3) tax-exempt status is not itself determinative of whether an organization is within the FTC’s jurisdiction, because the Internal Revenue Service (IRS) and the FTC use different definitions to determine which corporations are non-profits. The FTC considers both whether the organization engages in business only for charitable purposes, and whether the corporation or its members derive a profit from the organization’s business activities. The FTC paid special attention to how hospitals and healthcare companies that have 501(c)(3) tax-exempt status may still be subject to the FTC rule. 

The FTC rule applies to all workers who work for an employer within the jurisdiction of the FTC, even if the worker is an independent contractor or otherwise not categorized as an FLSA “employee.”

The FTC does not regulate banks, savings and loan institutions, Federal Credit Unions, common carriers, air carriers and foreign air carriers, and entities subject to the Packers and Stockyards Act. Businesses that fall within these exceptions will not be impacted by the FTC Rule. 

When will the rule go into effect?

As of right now, the final FTC rule is set to go into effect on September 4, 2024.

Several entities have sued to stop the non-compete ban from going into effect, alleging under multiple theories that the FTC does not have the power to create this rule. The litigation may delay the effective date or invalidate all or part of the rule. Recent Supreme Court decisions make the ultimate result of the litigation difficult to predict.

What should I do?

Businesses that fall within the FTC’s jurisdiction should proactively develop a plan to comply with the Rule and, if necessary, develop alternative strategies for protecting their intellectual property and goodwill, ideally by September 4, 2024 (including but not limited to requesting that senior executives sign non-competition agreements before September 4).

If you would like Seder & Chandler LLP to assist with evaluating whether your business falls within the jurisdiction of the FTC or help you create a plan for compliance, please contact one of our team.