Legal Update: The FTC's Final Rule Banning Non-Competes

In our previous article, we wrote about the Federal Trade Commission (FTC)’s proposed rule that aims to ban certain post-employment non-compete clauses in employment contracts. This proposed rule not only focuses on traditional non-competes, but also raises questions about the enforceability of Non-Disclosure Agreements (NDAs) that could be interpreted as de facto non-competes. 

As of April 23, 2024, the FTC has voted to issue a final rule that bans the use of non-compete clauses across various industries (the “Rule”). As part of its findings, the FTC has determined that non-competes are an “unfair method of competition”, and therefore violate Section 5 of the Federal Trade Commission Act (“FTC Act”). The Rule would prohibit employers from entering into new non-competes with workers on or after the effective date (which would be 120 days from publication in the Federal Register). The rule would also prohibit employers from enforcing existing non-competes with workers other than “senior executives” (defined and discussed below).

Critics of the Rule (of which there are many) argue that this Rule is a major overreach by the executive agency, and should be addressed in the United States Congress. Moreover, the Rule likely constitutes a major interference with private freedom of contract rights. In fact, as of the date of this article, at least one major lawsuit has already been filed seeking to enjoin the Rule. The U.S. Chamber of Commerce filed suit on April 24, 2024 in United States District Court for the Eastern District of Texas, seeking both declaratory and injunctive relief. According to the Chamber’s lawsuit, “[t]he sheer economic and political significance of a nationwide non-compete ban demonstrates that this is a question for Congress to decide, rather than an agency…”.

This Article will not focus primarily on the propriety of the FTC’s Rule (or lack thereof), but will instead seek to inform small business owners who are simply interested in finding out what the Rule says and does. In the event that the Rule does go into effect, business owners and compliance professionals must be ready to take appropriate action in order to maintain compliance.

Historical Context and Development of Non-Compete Clauses

Non-compete agreements have a long-standing history in the American workplace, designed originally to protect businesses by restricting former employees from joining direct competitors. Over time, the use of these clauses expanded, leading to widespread debate over their impact on labor mobility and economic innovation. Originating from English common law, non-compete clauses were sparingly used in the U.S. until the rise of corporate America, where they became a tool to safeguard trade secrets. Now, in the 21^st century, non-competes are increasingly common in employment contracts across industries. However, they have likewise faced increasing scrutiny for their potential to unfairly limit workers' future employment opportunities and suppress salary growth.

What is a Non-Compete?

In common parlance, we refer to the FTC’s banning of ‘non-competes’. However, technically the FTC is most interested in ‘Non-Compete Clauses’. In other words, it is not helpful to simply focus on the title of a particular document to determine whether it is prohibited; rather, one must review the content of the document to see if it contains a prohibited ‘Non-Compete Clause’—which is defined by the FTC as “any contractual provision that penalizes a worker for, or functions to prevent a worker from,” “seeking or accepting work” or “operating a business” in the United States (see Final Rule at pp. 561-562). 

Under this broad and vague definition, many (if not all) types of restrictive covenants that address solicitation, competition, or disclosure of trade secrets/proprietary information to competitors when working for them may be banned. More concerning, however, is the fact that Rule does not make any exceptions for industry type, types of business interests, salary, skillset, or seniority (for future employees). The only meaningful exception—discussed below—is for pre-existing “senior executives”.  

Rule Analysis

So just what does the Rule actually state? The following contains excerpts and direct quotes from the FTC’s fact sheet, which can be found by clicking here:

1. The Rule states that non-competes are an “unfair method of competition”. As a result, the rule prohibits employers from entering into new non-competes with workers, as of the effective date. 
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2. The Rule also prohibits employers from enforcing non-competes with workers other than senior executives as of the effective date. Under the Rule, the term “senior executive” means an employee who earns more than $151,164 per year, and who are in a “policy-making position.” It is notable that, according to the FTC, less than 1% of workers are estimated to be “senior executives”. Therefore, the overwhelming majority of pre-existing non-competes will be considered unenforceable. 
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   • What is a “policy-making position”? The Rule defines this as a president, CEO, or the equivalent or any other officer of a business entity who has “policy-making authority” (or similar person). Included in this is an officer of an affiliated entity who might exercise authority across the enterprise as a whole. 
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   • What is “policy-making authority”? The Rule defines this as the final authority to make policy decisions that control significant aspects of a business entity or common enterprise; however, it doesn’t include simply advising others on their conduct. Therefore, an in-house policy advisor who prepares memorandum for a senior-level employee, but who does not have the actual authority to enact the policies themselves, likely does not have policy-making authority under the Rule.
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3. The Rule further requires employers to notify workers whose non-competes are no longer enforceable that their non-competes are no longer in effect and will not be enforced. The FTC has provided the following model language that employers can use to notify employees:

“A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:

• You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].

• You may run your own business—even if it competes with [EMPLOYER NAME].

• You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit ftc.gov/non-competes. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at ftc.gov/non-competes.”
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4. The Rule does include an exception that allows non-competes between the seller and buyer of a business. This is good news for business brokers and sellers of businesses, who know that the non-compete is a crucial component of any asset or equity sale.

What Comes Next?

As mentioned above, a lawsuit has already been filed by the U.S. Chamber of Commerce in United States District Court for the Eastern District of Texas. If successful, the lawsuit would enjoin (prevent the enactment of) the Rule, and potentially render a declaration as to the validity and lawfulness of the Rule (this is the ‘declaratory relief’ component of the lawsuit). It is possible and likely that further lawsuits by other key stakeholders will also be filed. 

As more suits are filed, the likelihood of the Rule actually going into effect probably decreases—at least as the Rule is currently configured. Additionally, the push for the Rule in the first place came from guidance directed towards the FTC from the Biden administration. As we are in an election year and there is a possible administration change looming in the near future, it is also possible that the Rule is scrapped entirely as new priorities come into play. 

What Should Employers do if the Final Rule is Enacted?

In the event that the Rule does go into effect, business owners and compliance professionals need to be prepared to take proactive steps to ensure compliance. Accordingly, here are five (5) things that you should be prepared to do if and when the Rule takes effect:

1. Do not include non-compete clauses in any future employment contracts or packages. This would apply to all workers—including senior executives (recall that the senior executive exemption is only for pre-existing non-compete clauses, not prospective ones).
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2. As for any current non-compete clauses in effect, you will need to provide written notice to current and former (non-exempt) workers that their non-compete clauses are now unenforceable. As for the language of such written notice, the FTC has provided model language for you to use (see above). However, you are NOT required to use this exact form of notice; you can write your own and, if you choose to do so, be sure to seek legal advice in the process. The required notice can be distributed via direct handout, postal mail, email, or SMS. This notification is also required to be sent to ex-employees who are still bound by non-compete agreements, except in cases where the employer lacks a current address, email, or phone contact. Importantly, the notice need not specify that it pertains to a non-compete agreement, allowing employers the flexibility to issue a general notification to all current and former staff. Furthermore, the regulation does not mandate the annulment of existing non-compete agreements.
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3. Do not enforce existing non-competes for any workers other than exempt senior executives, nor threaten to do so. This would include sending a demand letter, filing a lawsuit, or sending an email alleging a breach or action. Please note, however, that this Rule does NOT prohibit enforcing a claim against a senior executive for a non-compete that was breached prior to the Rule’s effective date. For instance – if the Rule takes effect on September 1, 2024, and you find that a senior executive breached their non-compete on February 1, 2024, you may still be able to bring an action to enforce the non-compete under the current Rule.
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4. Revise and enhance your existing employment and contract documents – such as revisiting the language contained in your NDAs, revising your restrictive covenant agreements to remove prohibited non-compete clauses, and developing substitute provisions as “fall back positions” in consultation with your legal counsel.
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5. Modify your employee retention and recruitment policies. If you are in a highly-competitive industry where you have previously relied heavily upon non-competes to retain your workforce, you will need to think seriously and strategically about how to pivot. You will need to change your approach from one of restriction, to attraction. Invest in things like employee professional development, robust workplace benefits, generous and flexible work and PTO policies, positive culture-building, and healthy work-life balance promotion. 
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Frequently Asked Questions (FAQ)

The following FAQs include some of the questions and answers published by the FTC in their small entity compliance guide (located here):

1: When is the effective date?

The Rule takes effect 120 days after it is published in the Federal Register, likely in early September of 2024. Please check with your legal counsel for an up-to-date answer.
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2. Which workers are covered by the Rule?

The Rule applies to non-competes with all workers, whether full-time or part-time, including employees, independent contractors, interns, externs, volunteers, apprentices, and others—but

there are different requirements for senior executives as defined by the Rule (see Questions 5-6).

3. Which businesses are covered by the Rule?

The Rule covers all types of businesses in nearly all industries. Some employers are outside the FTC’s jurisdiction and therefore not subject to the Rule. This includes banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits.

4. What is a non-compete?

A non-compete clause is a term or condition, often in an employment contract, that prohibits, penalizes, or functionally prevents a worker from getting a different job or starting a business after leaving their employment. Here’s what that covers:

• Prohibits: Terms and conditions expressly saying that a worker can’t get another job, such as with a competitor, or start a business.

• Penalizes: Terms and conditions that require a worker to pay a penalty if they get another job or start a business.

• Functionally prevents: Terms and conditions that aren’t labeled as non-competes but are so restrictive that they effectively prevent a worker from getting a new job or starting a business.

5. Is there something different about how non-competes with senior executives are treated under the Rule?

Yes. After the effective date, you can’t enter into a new non-compete with any worker covered by the Rule—that includes senior executives. However, an existing non-compete with a senior executive is still valid. In contrast, for workers other than senior executives, you cannot enforce existing non-competes after the effective date and you must give these workers notice that their non-competes will not be enforced.

6. What if I don’t use non-competes?

You don’t need to take any steps to comply with this Rule. Just make sure you don’t use non-competes in the future.

7. Can I send an all-staff email using the model language and meet the notice requirement for my current workers?

Yes, an all-staff email with the model language meets the requirement. You can send an all-staff email even if you use non-competes only for some workers.

8. Can I hire a worker who had a non-compete in their prior job?

Yes, if the prior non-compete is covered by the Rule. Unless the worker was a senior executive, the prior non-compete is no longer enforceable after the Rule’s effective date.

9. Does the Rule apply to non-competes between businesses?

The Rule only applies to non-competes between businesses and workers. For example, the Rule does not apply to non-competes in franchisor/franchisee contracts, but it does apply to non-competes between employers and workers at franchises. However, those other non-competes, including between businesses, would still be subject to other antitrust laws.

10. What if I’m selling my business?

The Rule doesn’t apply to non-competes between a buyer and seller of a business (or potentially the seller’s share of a business). The seller can agree to a non-compete individually, but not for any of the business’s workers. The Rule prohibits non-competes for workers, including in a sale of business context.

Florida business owners and compliance professionals are encouraged to consult with legal advisors and follow ongoing discussions and guidelines provided by the FTC and other regulatory bodies. As we move into a new era of employment law in the United States, Florida businesses face unique challenges and opportunities. By proactively adjusting to these changes, they can safeguard their competitive edge while fostering a fairer and more dynamic labor market.
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NOTE: At the time of writing, the FTC’s Rule has not gone into effect; and, based upon the outcome of current and future litigation, may not go into effect at all; or, if it does, may be substantially modified. This article provides guidance in the event that the Rule, as currently drafted, does go into effect. The reader is strongly advised to consult with legal counsel regarding the current status and effect of the Rule before making any decisions (or refraining from decisions) based upon this Article.

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