Federal Trade Commission Bans Noncompetes – Contract of Employment

Yesterday, the Federal Trade Commission (FTC) issued a new rule banning virtually all
noncompete agreements covering workers in the United States. Absent
a successful court challenge, the rule will go into effect 120 days
after publication in the Federal Register (which is expected to
happen shortly).

Under the new rule, and subject to a few narrow exceptions,
companies are banned from entering into new noncompete agreements
and enforcing noncompete agreements
currently in effect with all workers.

The definition of “worker” is broad and includes not
only employees but also independent contractors, externs, interns,
volunteers, apprentices, or sole proprietors. The definition of
“worker” does not include a franchisee in the context of
a franchisee-franchisor relationship.

A noncompete agreement is defined as an agreement that prohibits
a worker from, penalizes a worker for, or functions to prevent a
worker from (i) seeking or accepting work with another person after
the end of employment or (ii) operating a business after the
conclusion of employment.

The final rule provides that the use of noncompete agreements is
an “unfair method of competition” that violates Section 5
of the FTC Act. Violations of the FTC Act can result in fines,
penalties, and other injunctive relief.

Noncompete Recission and Notice
Requirements

Existing noncompete agreements with workers other than senior
executives will no longer be enforceable under the new rule
(presuming it goes into effect). Employers will not be required to
rescind these agreements, but will be required to notify affected
workers that the agreements are no longer enforceable. The FTC has
issued a model notice for this purpose.

The new rule allows existing noncompete agreements with senior
executives to remain in effect. “Senior executive” is
generally defined as an employee “earning more than $151,164
annually who [is] in a policy-making position.” These
positions include an entity’s president, chief executive
officer or the equivalent, or any other officer who has the
authority to make policy decisions that control significant aspects
of the business entity. However, companies can no longer enter into
noncompete agreements with senior executives after the effective
date of the final rule.

Exceptions

Noncompete agreements ancillary to the sale of a business remain
permissible. In addition, the new rule does not prohibit an
employer from pursuing a cause of action against a worker who
violated their noncompete agreement prior to the effective date of
the rule.

Because the FTC’s authority only extends to for-profit
businesses, the final rule will not affect employment agreements
entered into by workers employed by non-profit organizations. While
the FTC recognizes this limitation, it has stated it reserves the
right to evaluate an entity’s non-profit status.

Relations to Other State Laws

The final rule does not limit or affect the enforcement of state
laws that already restrict noncompetes, so long as the law does not
conflict with the final rule. The final rule only supersedes
existing state laws where the state law conflicts with the final
rule.

Takeaway for Employers

During the 120 days before the final rule goes into effect,
employers should identify all employees who have signed non-compete
agreements, and of those employees, identify which qualify as
“senior executives” under the rule. Employers should
identify those individuals to whom notices will need to be
provided, but should not issue such notices until closer to the
effective date.

It is anticipated that this final rule will be subject to
numerous legal challenges. The U.S. Chamber of Commerce has already
filed a lawsuit seeking to strike down this ban in the U.S.
District Court for the Eastern District of Texas, Chamber of
Commerce of the United States of America v. Federal Trade
Commission. The U.S. Chamber of Commerce alleges that the FTC
lacks the power and authority to unilaterally ban noncompete
agreements and seeks injunctive relief from the court to prevent
the implementation of the final rule. Additional lawsuits
challenging the rules are expected to follow.

Unless and until a court issues a temporary restraining order or
preliminary injunction that would delay the implementation of the
final rule, employers should begin the process of planning for the
impact of the ban. The final rule does not generally ban other
restrictive covenants, such as confidentiality or non-disclosure
agreements. Corporations concerned about protecting their
intellectual assets should review their confidentiality agreements
to ensure adequate protection and restructure their employment
agreements to comply with the new rule.

Taft attorneys will continue to monitor these developments and
are available to assist you or your company in evaluating the
impact of this new rule.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.