Written by Kendra D. Simmons from Fredrikson & Byron PA on September 1, 2024
If you do not have time to read all 570 pages of the Federal Trade Commission’s (FTC) final rule and explanation banning noncompetes, here are the essentials.
What Does the Final Rule Do?
At a high level, the final rule bans new noncompetes, bans the enforcement of now-prohibited noncompetes, and bans efforts to represent to any workers that they are subject to a noncompete prohibited under the new rule. While employers may continue to enforce noncompetes against senior executives (who must meet both an income and duties test as set forth in the new rule), employers may not enter new noncompetes even with senior executives after the rule’s effective date.
In addition to these prohibitions, employers must, by the rule’s effective date, affirmatively notify employees (other than senior executives) that their noncompetes are no longer enforceable. The FTC provides model language in the final rule, although employers are also allowed to use their own language.
Importantly, the ban on noncompetes and enforcement does not apply to actions accruing prior to the rule’s effective date.
When Does It Take Effect?
Depending on the outcome of pending legal challenges, the new rule becomes effective September 4, 2024. At the time this article was last updated in June 2024, there was nothing to pause this effective date, but that may have changed with a ruling expected in early July.
To Whom Does the Final Rule Apply?
The ban applies to employers within the FTC’s jurisdiction, meaning that nonprofits and other organizations exempted under the FTC Act are excluded. Workers protected under the rule are defined broadly to include both current and former employees and independent contractors.
Under the current language of the final rule, banks, savings and loan institutions, and credit unions are excluded from the FTC’s jurisdiction, with certain exceptions. However, as the final rule explains, the FTC specifically rejected the suggestion that an express exemption to this rule be created for “bank holding companies, subsidiaries, and other affiliates of Federally regulated banks.” Instead, these and other banking- or finance-adjacent firms and businesses will likely fall under the FTC’s jurisdiction. Legal counsel can help determine how the final rule applies to your organization.
What Are the Biggest Differences Between the Proposed and Final Rules?
One of the most significant differences is the FTC’s change to the proposed parameters of the “sale of a business” exception to the ban. Whereas the rule proposed over a year ago required that at least a 25% interest be sold for a noncompete to be allowed, now only a “bona fide” sale is required. The rule does not define “bona fide” but requires that the noncompete be entered “pursuant to 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 FTC also modified the details of the notice that employers are required to provide to workers regarding the ban. Rather than requiring formal rescission of agreements, employers need only notify individuals before the rule’s effective date that their noncompetes are no longer enforceable. Notably, though, this timeline is accelerated from the 180 days after the effective date that employers had under the proposed rule to comply with this requirement.
Why Is the FTC Banning Noncompetes?
The FTC spends dozens of pages explaining why it believes noncompetes are an unfair method of competition that it believes should be banned, including that they are overused, repress wages, and reduce worker mobility. To achieve its goals, the FTC believes it necessary to prohibit enforcement of even current noncompetes.
After considering over 26,000 comments (25,000 of which the FTC claims supported a total ban), the FTC declined to make more significant changes from the proposed rule because it believes employers have sufficient alternatives to protect their legitimate business interests.
Where Do We Go From Here?
At the time of writing this article, multiple lawsuits had already been filed in Texas and Pennsylvania federal courts focusing largely on what the plaintiffs believe is a lack of authority by the FTC to enact this kind of substantive rule. On the FTC live webcast announcing the final rule, the two FTC commissioners who voted against it explained their rationale, echoing these arguments, which will likely appeal to certain judges hearing the challenge as well as to Justices of the U.S. Supreme Court who have recently decried nationwide injunctions. By the time this article is published, we should know whether an injunction will be issued in the first of the lawsuits filed in Texas federal court.
As the results of any legal challenges work themselves out, current parties to noncompete litigation should be prepared to answer questions about the new rule even though actions accruing prior to the effective date are excluded. In addition, employers should anticipate that their employees may hear about this rule and ask questions about whether their noncompete is still effective. Employers should be prepared to respond in some fashion even as they evaluate their best course of action and the potential for legal challenges to the rule.
