IMPORTANT UPDATE: On August 20, 2024, A federal district judge in Texas blocked the Federal Trade Commission from enforcing its new rule on September 4. According to the FTC, they are considering an appeal, and this decision does not prevent the FTC from case-by-case enforcement actions. Stay tuned for updates on this, and speak with an attorney about your specific non-compete questions and their recommendations.
Historically, employers have frequently had employees sign non-compete agreements in which an employee agrees to refrain from working with or for a similar business to the current or recently previous employer, often within a certain geographic area for a certain period of time. For example, a company that designs, builds, and sells office chairs might have had its chair designers sign a non-compete, where they agree they will not work as a designer for another competing office chair company in Pennsylvania for 2 years after they leave the company. (We’ve written about these before if you want more background.)
However, the Federal Trade Commission (aka the FTC), the US federal agency tasked with consumer protection and fair competition rules, finalized a rule in April that makes such noncompete agreements a violation of federal law as a method of unfair competition, effective this September. Employers will be prohibited from having workers sign non-compete agreements, and all currently active non-compete agreements, less a few exceptions for “senior executives”, will be invalid. (Read the FTC’s fact sheet here.)
According to the FTC, this will affect over 30 million workers or about 18 percent of the US workforce. The FTC argues such agreements stifle competition, are often misused, and hinder new development. The ban on noncompetes uses the word “worker” rather than employee because it applies to all people “who work or who previously worked, whether paid or unpaid” regardless of their title or status. This includes employees, independent contractors, externs, interns, volunteers, apprentices, service providers, among others.
What About Non-Competes Signed Before This Rule Goes Into Effect?
Once the rule goes into effect on September 4 2024, employers are prohibited from enforcing any noncompete signed before the effective date except for “senior executives” (workers earning more than $151,164 and in a ‘policy-making position’, which the FTC estimates comprise less than 1% of workers).
Additionally, employers who have had workers sign non-competes are required to notify workers that any existing non-competes are no longer valid or enforceable. (The FTC provides model language that employers can use to notify employees downloadable here: https://www.ftc.gov/system/files/ftc_gov/images/new-rule-image-noncompete-rulev3.png.)
Are There Any Exceptions?
In addition to the “senior executive” exception for current non-competes, the rule also explains it does not apply to those related to the sale of a business entity. Often, when selling a business, the buyer of the business seeks to ensure the seller does not intend to go start another competing business (read more about buying and selling businesses in our resource about the process).
Additionally, the ban may not apply to certain non-profits, banks, carriers, and fixed-term employee agreements, among others, but even these are pretty nuanced, so talk to an attorney to see what likely will or will not fly.
What About Non-Solicit Agreements?
Non-solicitation agreements, which prevent workers from actively pursuing the employer’s clientele or customers, employees, business relationships, among others, are referenced by the FTC as not explicitly banned under the new rule, however these agreements could still satisfy the definition of a non-compete clause if they still “function to prevent a worker from seeking or accepting other work,” and could still be a method of unfair competition. Thus, it’s important that businesses seeking to utilize non-solicitation agreements should work with an attorney to ensure such agreements are not overly restrictive.
What Happens If An Employer Violates the Rule?
Once the rule becomes effective, non-competes will no longer be valid so “violations” by workers of the agreement are not enforceable by employers. Additionally, suspected violations of the rule can be submitted to the Bureau of Competition by sending an email to noncompete@ftc.gov. The FTC may pursue legal action against those in violation.
So How Can An Employer Still Protect Their Trade Secrets, Clientele, Data, Etc.?
If you’re an employer who is worried about employees taking that secret formula or specialized process, there are still alternative ways to protect proprietary details depending on your industry and what you want to protect. For example, a non-disclosure agreement or non-solicitation agreement (in some circumstances) may still be useful. Or, perhaps it’s time for an employee handbook refresh to communicate expectations for company materials and how to best protect your business and clientele (read our resource about this here!). Additionally, theft of trade secrets is still a criminal violation under federal law (in certain circumstances.)
We recommend speaking with an attorney about the new rule, and alternative ways to protect your unique business and industry.
DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.
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