FTC Declares Employees Free From Most Noncompetes, But How Far Does The Ban Go And Will It Last? – Contract of Employment

During an Open Commission Meeting
on April 23, 2024, the Federal Trade Commission (“FTC”)
voted 3-2 in favor of issuing the Noncompete Clause Rule (the
“Final Rule”), which, with limited exceptions, makes it
unlawful to enter into noncompete agreements with
workers¹on or after the Final Rule’s effective date,
which is 120 days after its publication in the Federal Register
(“effective date”).The FTC determined that noncompetes
are an unfair method of competition and, therefore, violate Section
5 of the Federal Trade Commission Act.Here are the highlights of
the Final Rule:

• Existing noncompetes that were entered into before the
  effective date remain in force for senior executives, which the
  Final Rule defines as a worker in a “policy-making
  position” with a total annual compensation of at least
  $151,164 in the preceding year or total compensation of $151,164
  when annualized so long as the worker was only employed during part
  of the prior year.The Final Rule defines a policy-making position
  to include a business entity’s president, CEO or the
  equivalent, another officer of a business entity (vice president,
  secretary, treasurer or principal financial officer, comptroller or
  principal accounting officer, or any other natural person routinely
  performing corresponding functions) who has policy-making
  authority, or any other natural person who is not an officer who
  has policy-making authority for the business similar to an officer
  with policy-making authority.




• After the effective date, existing noncompetes for workers who
  are not senior executives are unenforceable.Employers are
  prohibited from entering into or enforcing new noncompetes with all
  workers.




• Employers must provide workers who are not senior executives
  “clear and conspicuous notice by the effective date that the
  worker’s noncompete clause will not be, and cannot legally be,
  enforced against the worker.” Section 910.2(b)(2) & (4) of
  the Final Rule provides the form of notice and model language that
  satisfies the notice requirement to the worker.The FTC eliminated a
  provision in the proposed rule issued in January 2023, which would
  have formally required employers to rescind existing noncompete
  agreements.

Section 910.3 of the Final Rule provides the following
exceptions:

• The Final Rule does not apply to noncompete clauses entered
  into by a person under 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.




• The Final Rule does not apply where a cause of action related
  to a noncompete clause accrued before the effective date.




• Where a good-faith basis exists to believe that the Final Rule
  is inapplicable, it is “not an unfair method of competition to
  enforce or attempt to enforce a noncompete clause or make
  representations about a noncompete clause.”

Additionally, under § 910.4(a), the Final Rule will not
limit or affect the enforcement of State laws applicable to
noncompete clauses, including, but not limited to, state antitrust
and consumer protection laws, so long as such State laws do not
conflict with the Final Rule. Nevertheless, the Final Rule will
preempt State laws that conflict with its language.

The Final Rule presents broad implications for employees and
employers, but court challenges are inevitable. For instance, the
U.S. Chamber of Commerce submitted its strong opposition to the
FTC’s proposed rule and, in an April 17, 2023 letter to the
FTC, called the “categorical ban” representative of
“arbitrary and capricious decision-making.” On
April 24, 2024, the U.S. Chamber of Commerce and other business
groups filed a lawsuit against the FTC in the U.S. District Court
for the Eastern District of Texasin which the plaintiffs seek an
order permanently enjoining the FTC from enforcing the Final
Rule.

Dickinson Wright will continue to monitor all developments,
including pending litigation, that may affect the implementation of
the FTC’s Final Rule. In the meantime, companies should assess
how they can protect their trade secrets and confidential
information without the ability to enforce noncompete agreements.
Dickinson Wright attorneys can assist in determining how the Final
Rule and other developments will affect existing and future
employment agreements.

Footnote

1 The final rule affects employers within the FTC’s
jurisdiction and applies to employment agreements with a wide range
of paid or unpaid workers, including employees, independent
contractors, and interns.Although the FTC does not have
jurisdiction over most nonprofit organizations, such as some
hospitals and healthcare systems, it does have jurisdiction over
nonprofits that actually operate for profit or the profit of their
for-profit members, for example, where nonprofit hospitals have
relationships with for-profit physician practices.

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.