Written By: Francine Alfandary and Austin Ochoa
Please note: On August 20, 2024, a federal district court in Texas issued a ruling that blocks the FTC ban on non-competes nationwide. As a result, the future of the ban remains uncertain.
On April 23, 2024 the Federal Trade Commission (FTC) passed a new regulation (the Final Rule) that bans the use of non-compete clauses as “unfair methods of competition” under Section 5 of the FTC Act, with minimal exceptions. However, the Final Rule has faced significant legal challenges. On August 20, 2024, a federal district court in Texas blocked the FTC’s Final Rule nationwide, stating that the agency exceeded its authority. This decision halts the scheduled implementation of the Final Rule, which was set to take effect on September 4, 2024.
Legal challenges to the Final Rule began almost immediately, with the first lawsuit filed within 24 hours of its passage. A recent federal district court decision in Texas blocked the Final Rule, ruling that the FTC lacks the statutory authority to enforce such a broad ban. This decision contrasts with an earlier ruling in Pennsylvania, where a federal district court upheld the FTC’s regulatory power. These conflicting decisions cast significant doubt on the Final Rule’s future.
Given the recent ruling, the future of the Final Rule is uncertain. Employers should stay informed about ongoing developments, as the enforceability of the ban could be significantly impacted. While the implementation of the Final Rule is currently on hold, businesses should remain vigilant as the situation evolves.
Overview of the Final Rule
General Ban: Starting on the date the Final Rule takes effect, employers may no longer:
- enter into or attempt to enter into a non-compete clause with employees or independent contractors;
- enforce or attempt to enforce an existing non-compete clause against employees or independent contractors; or
- represent that an employee or independent contractor is subject to a non-compete clause.
Non-compete agreements entered into BEFORE the Final Rule takes effects will remain enforceable for “senior executives”.
Senior Executives: The Final Rule preserves existing non-competes for “senior executives”, who are defined as workers earning more than $151,164 annually and who are in “policy-making positions”. However, following the rule’s effective date, employers cannot mandate senior executives to enter into new non-competes. Workers holding “policy-making positions” encompass the president, chief executive officer, or equivalent roles, as well as any other individuals with equivalent policy-making authority within the business.
Existing Non-Competes: The Final Rule does not mandate the termination of current agreements that contain non-compete clauses. However, it does require employers to inform workers that their non-competes will not be enforceable. The FTC has created model language that employers can use to communicate this notice to workers. Pearl Cohen can provide you with a notice tailored to your employees.
Franchisees-Franchisors: The Final Rule does not apply to a franchisee in the context of a franchisee-franchisor relationship, though they do apply to the workers of these entities.
Scope of Non-Competes
The Final Rule broadly defines a “non-compete clause” to encompass a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- 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
- operating a business in the United States after the conclusion of the employment that includes the term or condition.
Exemptions and Clarifications
The Final Rule contains three broad exceptions:
- Bona fide sales of business: The Final Rule does not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
- Existing causes of action: The Final Rule does not apply where a cause of action related to a non-compete clause accrued prior to the effective date.
- Good faith: It is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that the Final Rule is inapplicable.
Notice Requirement
Employers must give a “clear and conspicuous” notice to workers (except for senior executives) who are subject to existing non-competes that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. The FTC has created model language that employers can use to communicate this notice to workers. Pearl Cohen can tailor a notice to your employees.
Legal Challenges
The FTC’s authority to enforce the non-compete ban has been heavily contested in federal court, culminating in a recent decision by a federal district court in Texas that blocked the Final Rule, citing the FTC’s overreach in regulatory power. This ruling is currently the most significant legal challenge to the FTC’s authority, although other cases, such as those pending in Pennsylvania and Florida, continue to contribute to the ongoing legal uncertainty.
Next Steps for Employers
- Prepare a list of employees and independent contractors who have signed non-competition agreements.
- Determine which are “senior executives” under the Final Rule.
- Prepare a notice to employees and independent contractors who have signed non-compete agreements and who are NOT senior executives, notifying them that the employer will not enforce their non-compete agreement.
- Revise any employment agreements or consulting contracts to remove references to non-compete clauses. If the Final Rule takes effect, the employer will use these revised templates.
Given the current legal landscape and the recent federal district court’s decision blocking the Final Rule’s implementation, it is crucial for employers to actively monitor ongoing developments. Employers should review existing employment agreements and be prepared to make necessary adjustments if the legal situation changes. Staying informed about these cases is essential, as the outcomes could significantly impact the enforceability of the Final Rule. Employers must be ready to adapt quickly to any shifts in the legal landscape.
If you have any questions about how these changes may impact you or your business, please don’t hesitate to contact us:
Francine Alfandary, Partner in the US Corporate Practice Group, at falfandary@pearlcohen.com
Austin Ochoa, Associate Attorney in the US Corporate Practice Group, at aochoa@pearlcohen.com
