A long-anticipated vote by the Federal Trade Commission (FTC) commenced on April 23, 2024. The vote concerned a nationwide ban on non-compete clauses with workers. Prior to the vote, the legality of non-compete clauses was decided state by state. However, the FTC has ruled 3-to-2 in favor of banning non-compete agreements, stating “it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date.” (Federal Trade Commission Billing Code: 6750-01-P).The ban invalidates future non-compete agreements with workers and makes existing non-competes unenforceable. However, it does not apply to non-competes with senior executives who meet a specified compensation threshold, if the clause was created prior to the ban’s effective date. Additionally, the ban will not apply to non-compete clauses between a buyer and seller of a business.
The final rule, officially called the “Non-Compete Clause Rule”, will be added to the already existing Federal Trade Commission Act (FTC Act). The FTC Act works as a federal protection against unfair methods of competition and any unjust acts that may affect commerce. The Non-Compete Clause Rule will come into effect 120 days after its publication in the Federal Register, the official journal of the federal government.
Going forward, the main concern for businesses is how this will impact the way they protect themselves from competition. Notably, the transition to the national ban on non-competes is not sudden and had been well anticipated. Many states, namely California, already have statutes in place banning non-compete clauses. Other states, such as Texas, do not specifically ban non-competes, but have specific requirements regulating their use or their state courts do not easily enforce such clauses.
Regardless, the new rule has created quite a stir and is already subject to legal challenges that could change its course. Until that time, employers will have to wait and watch and adopt a cautious approach while imposing non-compete obligations on their workers. It is advisable for employers to use this interim period to identify existing non-compete clauses with their current and former workers and assess if any workers qualify as “senior executives”. If and when the rule becomes effective, employers will have to tread very carefully with non-competes and consider using alternative legal protections like stronger trade secret and confidentiality clauses in their agreements with employees. For more information regarding the enforceability of non-compete agreements, help understanding the new rule, or case-specific questions, contact the trusted Chugh, LLP corporate attorneys.
