Written by Brooke Colaizzi from Sherman & Howard on April 23, 2024
In a long-awaited and much-debated move, the Federal Trade Commission (FTC) voted Tuesday to ban nearly all non-competition agreements in the United States on the grounds they are an unfair method of competition.
The vote came almost a year and a half after the FTC first issued the sweeping proposed rule, which not only prohibits businesses from proposing or entering into non-competition agreements with employees and individual independent contractors but would require businesses to affirmatively rescind all existing non-competition agreements.
Key points to know:
- The rule prohibits businesses from even proposing a non-competition agreement to an employee or contractor (yes, it prohibits non-compete agreements with non-employee individuals) and also requires rescission of all existing non-compete agreements, along with individualized notice of the rescission to employees and former employees.
- The rule does not extend to non-competition agreements between businesses, but those agreements would remain subject to existing antitrust and other laws.
- Existing non-competes for “senior executives,” defined as employees in a “policy-making” position who earned at least $151,164 in total compensation in the preceding year, are preserved. Future executive non-competes are prohibited, however.
- Trade secret protections and non-disclosure agreements are generally not affected by the rule unless they are so broad as to function like a non-compete.
- Non-solicitation agreements also are not covered by the rule unless, again, they are so broad as to function like a non-compete.
- Employers not covered under the FTC Act (the FTC’s enabling statute) would not be covered by the rule. These employers include certain banks, savings and loans, common carriers, air carriers, and non-profits.
- The rule preserves existing and future non-competition agreements related to the sale of a business to the extent the non-competes apply to a “substantial” owner, member or partner of the selling business. “Substantial” is defined as a 25% ownership stake.
- Legal challenges are expected, specifically as to whether or not the FTC had the authority to implement the rule. The first lawsuits could be filed within days.
So, what does this rule mean for employers in the near- and long-term?
- The rule provides for a 120-day compliance period after the rule’s publication date, meaning employers would have four months to rescind existing non-competition agreements, provide individualized notice, and evaluate confidentiality and non-solicitation agreements for compliance with the rule and maximization of confidential information and trade secret protection. The rule contains proposed language sufficient to meet the “individualized notice” requirement.
- Keep an eye on the legal challenges. Courts often stay (delay) the implementation of a new rule when it is subject to legal challenge.
- Employers should take stock of how many existing non-competition agreements are out there and where those employees might be located.
- Employers should consider internal steps to enhance the protection of sensitive and proprietary information so as to better support categorizing such information as trade secrets.
Although the vote is over, the issues related to this rule will not be resolved for some time. Please contact your Sherman & Howard employment counsel for assistance in preparing to implement this rule and other questions.
