The FTC Broadly Bans Non-Competes but Enforceability Remains Uncertain

On April 23, 2024, the Federal Trade Commission (FTC), in a 3-2 decision, issued a final rule banning non-competes (the “Non-Compete Rule”). The Non-Compete Rule has broad implications for employers and employees alike and requires a review of agreements currently in existence and the permissible scope of restrictions set forth in new agreements.  While the Non-Compete Rule is expected to become effective on September 4, 2024 (the “Effective Date”), whether it takes effect will depend on the outcome of legal challenges already underway.

The Non-Compete Rule’s Prohibitions and Notice Requirement

The Non-Compete Rule prohibits entering into or enforcing non-compete clauses for all workers other than senior executives.  The term “non-compete clause” is broadly defined to capture any restriction, other than restrictions regarding confidential information and trade secrets, that potentially penalizes, prohibits or functions to prevent an employee from working for a different employer.  Likewise, the term “worker” is broadly defined to include employees, independent contractors, externs, interns, volunteers, apprentices, and similar individuals providing services.

With respect to senior executives, the Non-Compete Rule does not require employers to stop maintaining current non-compete clauses, but prohibits employers from entering into new non-compete clauses with senior executives after the Effective Date or enforcing such restrictions thereafter.  The Non-Compete Rule defines the term “senior executives” as employees who make at least $151,164 annually and are in a “policy-making position,” which means any person (e.g., presidents, CEOs, and equivalent officers) who has policy-making authority. We anticipate extensive debate regarding whether any given employee, by virtue of title and/or responsibility, is a “senior executive.”

By the Effective Date of the Non-Compete Rule, employers are also required to provide notice to any worker (other than senior executives with non-competes entered into prior to the Effective Date) who is subject to an existing non-compete clause, affirmatively advising that such non-compete cannot and will not be enforced. The FTC has published model notice language, and employers who use this model language will be deemed to have complied with the Non-Compete Rule’s notice requirement.

Exceptions to the Non-Compete Rule

The Non-Compete Rule does not apply (i) in the context of a sale of a business, a sale of an ownership interest in a business, or a sale of all or substantially all of a business’s assets or (ii) to existing causes of action.

Also, the Non-Compete Rule makes clear that employers will continue to be permitted to protect confidential and proprietary information as well as trade secrets. 

What is less clear is whether other restrictive covenants – such as covenants not to solicit customers, not to interfere in business activities, and not to hire away other employees – will also be at risk of being construed as impermissible covenants not to compete, depending on their breadth and impact. 

Legal Challenges

Several challenges to the enforceability of the Non-Compete Rule have been filed, including by Ryan, LLC and the U.S. Chamber of Commerce – each within 24 hours of the FTC issuing the Non-Compete Rule – as well as ATS Tree Services, LLC. Currently, the Ryan litigation is furthest along, after the court stayed the U.S. Chamber of Commerce litigation pursuant to a first-to-file rule. The outcome of these litigations remains uncertain, but the U.S. Chamber of Commerce was permitted to intervene in the Ryan litigation, and a ruling on the requested nationwide injunction is expected in early July.

Next Steps for Employers

Time for some Summer reading! We recommend employers review all current restrictive covenants (including, but not limited to, non-solicits, training reimbursement provisions, and forfeiture to compete clauses), in order to assess which restrictive covenants may be deemed unlawful if and when the Non-Compete Rule goes into effect. As always, even enforceable restrictive covenants should be narrowly tailored to protect the legitimate business needs of the employer and to comport with state laws. 

We are continuing to monitor developments regarding the Non-Compete Rule and will issue an update in the event that pending legal challenges alter the Effective Date or the scope of the Non-Compete Rule altogether. For guidance on how to navigate the Non-Compete Rule, for assistance in reviewing your current restrictive covenants or to address issues arising for you on this or any related topic, please contact Jennifer Platzkere Snyder or any member of Dilworth’s labor and employment team.