What Is the New FTC Rule on Non-Compete Agreements And Does It Affect My Company?

Posted May 20, 2024 in Business Law, Contracts

We have been getting questions from our business clients on the news of the new FTC rule banning non-compete agreements. Beginning on September 4, 2024, a new Federal Trade Commission (“FTC”) rule will go into effect reshaping the landscape of agreements prohibiting former employees from working for competitors and/or opening a competing business in the years immediately following their separation from an employer. These non-competition agreements (often called “non-competes”) have been a common and widely accepted method of protecting your business from the potential risks associated with investing time, money, and other resources into employee training and development only to have that employee take those skills and hand them over to a competitor or become that competitor by starting a new business. Beginning on September 4, 2024, the FTC’s new rule prohibits entering all such non-compete agreements with four narrow exceptions.

THE GENERAL RULE

In general, the FTC’s rule prohibits all post-end of employment non-competition agreements as an “unfair method of competition” so long as the business/industry is under the FTC’s regulatory authority. The rule does not apply to agreements and policies prohibiting concurrent employment with multiple companies. State laws continue to govern such bans.

Employers in the following industries are generally exempt from the FTC’s ban on non-competes as their industries (at least currently) fall outside of the FTC’s purview:

• Banks
• Savings and loan institutions
• Federal credit unions
• Common carriers
• Air carriers
• Businesses subject to Packers and Stockyard Act
• Nonprofits
  • Note: While nonprofits are officially outside the scope of the FTC’s jurisdiction as determined by Congress, the FTC has indicated that it believes it may have the authority to regulate certain nonprofits that it believes are actually organized for their own profit or that of their shareholders regardless of the entity’s stated nonprofit purpose. Hence, nonprofits should also take careful note of the new rule.

The FOUR EXCEPTIONS

If a business/industry does not appear on the list above, then it is presumably subject to the rule and cannot enter into or attempt to enforce any of its pre-existing non-compete agreements starting on September 4, 2024, unless at least one of the four following narrow exceptions applies:

• A pre-existing cause of action (i.e., lawsuit) has already been filed to enforce a non compete prior to the new rule.
  • For lawsuits commenced before the FTC’s new rule, these actions will generally be permitted to proceed to a final decision. No new enforcement lawsuits will be allowed after September 4, 2024 unless another exception applies.
• Pre-existing non-competes for “senior executives,” who are defined as (a) earning more than $151,164/year (for 2024) and (b) possess policy-making authority or “final authority to make policy decisions that control significant aspects of a business entity or a common enterprise.”
  • So long as a senior executive who meets the two-part test above signed a non compete prior to the FTC’s new rule, that agreement will remain valid and can be enforced through a lawsuit filed after September 4, 2023. No new non-compete agreements may be entered with senior executives after September 4, 2023, regardless of whether the two-part test is met. This narrow exception is only for past non-competes and cannot be used for new agreements entered after the rule goes into effect.
• Bona fide sales of business, defined as an arms’ length transaction where the seller of the business has an opportunity to negotiate the terms of the sale.
  • So long as a former business owner is truly selling a business to the buyer in a disinterested arm’s length transaction and agrees not to compete with the buyer after that sale, then a non-competition clause in the sale contract will generally be enforceable. The “bona fide” requirement appears to mean that business sales will be evaluated holistically by the FTC to ensure that employees and employers are not creating fictitious “sales” of worthless or inconsequential businesses simply to get around the general prohibition on non competes. Any such “sale” without substance will likely be disallowed by the FTC and the non-compete associated with it will be considered invalid.
• Good faith, which appears to be a sort of “catch all” provision stating that an employer can enforce a non-competition agreement entered in a “good faith” attempt to do something other than unfairly limit competition in its industry.
  • While this exception appears broad and easy to meet at first glance, it is important to exercise caution before relying upon this exception. Remember that the FTC’s rule clearly signals that the FTC’s default view is that all non-competes are an attempt to unfairly limit competition. Any employer seeking to rely upon this exception should be prepared to defend its reasoning in court as the FTC is quite likely to disagree with the employer’s reasoning for why its specific non-compete was entered in “good faith” despite the FTC’s general view that non-competes are generally impermissible.

NOTICE TO PAST/PRESENT EMPLOYEES REQUIRED PRIOR TO SEPTEMBER 4, 2024

In addition to invalidating any non-compete agreements that do not fall into the four narrow exceptions above, the FTC’s rule puts an affirmative requirement on employers to tell its current and past employees that its pre-existing non-competition agreements are invalid and will not be enforced. Notice is due no later than September 4, 2024. Failure to put past/present employees on notice is a rule violation.

The rule requires “clear and conspicuous” notice by mail, hand delivery, email, or text. It also includes model language for the notice which will satisfy the rule’s requirements if used verbatim in the employer’s notice.

LEGAL CHALLENGES AND THE UNCERTAIN FUTURE OF THE FTC RULE

While the FTC’s new rule appears to have effectively tossed out a host of state laws that have permitted non competes for decades or even centuries across the country with only a handful of narrow exceptions, the question of whether this rule will endure over the long term is far from certain. The first legal challenge to the FTC’s rule was filed in federal court on the same day its adoption was announced, and other lawsuits have quickly followed. Only time will tell if this rule will survive and become a permanent fixture of U.S. employment law. It may be struck down as unconstitutional, an abuse of the FTC’s rule making discretion, or otherwise invalid in the federal districts and circuits where it has been challenged. These questions may eventually be considered by the U.S. Supreme Court.

While these challenges work their way through the court system, employers and employees must prepare for the rule’s implementation and act to protect their interests until it becomes clear that the FTC’s rule is either here to stay or on the way out.

CONTACT AN ATTORNEY IN COLORADO TODAY

For further information and advice regarding non-competes, the FTC’s rule, and sending notice to current/former employees, reach out to Volpe Law today to request a consultation. We can be contacted through our online form, or you call us directly at (720) 441-3328. Our team of dedicated attorneys are here to listen to your case and identify the best legal options for you.

DISCLAIMER

The information contained on this website is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice on any subject matter. Laws frequently change and therefore this content is not necessarily up to date, nor comprehensive. Contact us or another attorney with any legal questions specific to your matter. You may request a consultation by completing our consultation request form.