Buelow Vetter Buikema Olson & Vliet, LLC

Blog

Buelow Vetter Blog

New FTC Rule Bans Non-Compete Provisions

 New FTC Rule Bans Non-Compete Provisions - Buelow Vetter Buikema Olson & Vliet

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning noncompete provisions nationwide.  Highlights of the proposed final rule are as follows:

  • The new rule prohibits employers from entering into new non-compete agreements with all employees, including senior executives.
  • Existing non-compete agreements with senior executives may remain in place. A “senior executive” is a worker earning more than $151,164 annually who is in a “policy-making position.”
  • Existing non-compete agreements for all employees other than senior executives become null and void on the effective date.There is no obligation to enter into new agreements, but the employer must provide notice to all such employees regarding the nullification of the non-compete provision. There is model language for notice provided in the final rule that employers may use.
  • The rule becomes effective 120 days after publication. Expect legal challenges that may delay implementation of the rule.

Introduction

The FTC rule was first proposed in January of 2023.  During the 90-day public comment period, the FTC received over 26,000 comments regarding the proposal.  Now that the final rule has been issued,  it will face certain challenges from the U.S. Chamber of Commerce and other groups.  Whether the final rule survives legal challenge is yet to be seen.

Definition of “Non-Compete”

The ban applies to “non-compete” provisions.  The FTC defines “non-compete” to apply not only to provisions labeled as “non-compete”, but also to contract provisions functioning as non-competes.  This would include any contractual provision that “has the effect of prohibiting the worker from seeking or accepting employment.” As examples of agreements/terms that may function as non-competes, the FTC identifies: (1) a nondisclosure provision that is “written so broadly that it effectively precludes the worker” from working in the same position for a new employer and (2) a provision that requires a worker to repay training costs where the repayment is not “reasonably related to the costs” of the training.

Whether the ban extends to non-solicitation provisions remains in question.  Under the FTC’s expanded definition, if a customer or employee non-solicitation provision was broad enough to prevent “a worker from seeking or accepting” employment, it could run afoul of the new rule.

Application of the Expanded Definition

The key question arising from the new rule is, what does it mean to “prevent the worker from seeking or accepting employment”?  It is unclear whether this is an objective or subjective question.  In other words, to run afoul of the rule, would the FTC require evidence the provision in question actually prevented a worker from seeking or accepting employment?  Or, would the worker’s own personal belief the provision prevents the worker from seeking or accepting employment be sufficient?

This ambiguity is significant because non-disclosure and non-solicitation provisions have long been used as alternatives to non-compete provisions for the simple reason they place no express restrictions upon a departing employee seeking employment, even with a competitor of the former employer.

Given the expansive new definition of non-compete, it is highly likely the FTC will take a subjective approach to this definition. However, multiple factors will come into play, such as the position of the worker and how the specific job relates to the prohibited conduct.  For example, a customer non-solicitation provision will be viewed differently for a salesperson versus a production manager.  Likewise, a customer non-solicitation provision will likely be viewed differently based on the number of competitors in a certain market as well as the number of potential customers in that same market.

Non-Disclosure Provisions are Likely Secure

In its press release regarding the final rule, the FTC stated as follows:

The Commission found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete.

Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA.

Thus, at least for now, non-disclosure provisions appear to be outside the scope of the ban, unless drafted so expansively they could be seen to prevent a worker from seeking employment.  However, a non-disclosure provision drafted so broadly as to fit into that definition is likely overboard and unenforceable under existing law.

Limited Exceptions

The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.  In addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date.

Legal Challenges

Just hours after the final rule was revealed, a tax services firm sued the FTC in the Northern District of Texas.  Around the same time, the US Chamber of Commerce, along with other business associations, filed suit for declaratory and injunctive relief in the Eastern District of Texas.  These lawsuits allege the FTC exceeded the authority granted to it by Congress by, in essence, creating legislation rather than simply issuing regulations interpreting existing law.

Employer Options

Given the legal challenges and enforcement uncertainty, the pending question is, what should I do now?  Employers basically have three options:

  1. Do nothing. Worst case scenario, the rule will not go into effect until 120 days after publication.  The current legal challenges are likely to delay that implementation even further.  If a stay is imposed, it could be years before the rule becomes effective, if ever.  Thus, there is time to take a measured approach and no need for a complete overhaul of all current agreements.  That said,  non-compete provisions have long been under attack and not just from the federal government.  Several states have enacted restrictions on the use of non-compete provisions and courts continue to be increasingly reluctant to enforce such provisions.  Thus, employers should review their current agreements to ensure narrow tailoring to account for these increasing challenges.
  2. Adhere to the proposed rule. Wanting to avoid taking the wait and see approach, employers may begin the overhaul process and eliminate non-compete provisions from their existing agreements.  While employers are free to retain the non-solicitation and non-disclosure provisions in their existing agreements, they should be reviewed to ensure compliance with the expanded definition of “non-compete.”
  3. Take a middle ground approach. Employers could retain non-compete provisions for high level executives and certain other highly compensated employees, hoping the pending litigation results in some delineation between levels of “workers” such that they are not all subject to the same prohibitions.

Obviously, there are risks and benefits with all these approaches and each employer will decide what best suits its legitimate business interests moving forward.

If you have any questions about this Legal Update, please contact:
Attorney Joel S. Aziere, 262-853-0600, jaziere@buelowvetter.com
Attorney Christina A. Katt, 414-309-8144 ckatt@buelowvetter.com
or your Buelow Vetter attorney.

Subscribe to our client alerts to get the latest insights into law directly to your inbox.