Overview. The Federal Trade Commission has issued its long-anticipated Rule banning non-compete agreements. The Rule prohibits all non-compete agreements except agreements with Senior Executives, as defined below, entered into before the effective date of the Rule. The Rule prohibits the enforcement of non-compete agreements between a business and all persons, including employees, independent contractors, or sole proprietorships. Such agreements are invalid irrespective of when they are entered. That is, the Rule generally renders ineffective and unenforceable all existing and future non-compete agreements with few exceptions.
Challenges. The U.S. Chamber of Commerce has already challenged the Rule in a lawsuit filed in the United States District Court for the Eastern District of Texas. The Chamber’s position, shared by many other critics, is that the FTC exceeded its authority under the 1914 FTC Act, which prohibits unfair methods of competition. Other lawsuits have been or will be filed challenging the Rule and the FTC’s authority to publish and enforce it.
A primary point of contention is the FTC’s authority to impose such a massive displacement of existing contracts, which are now governed by various laws in all 50 states. The Federal Trade Commission Act of 1914 vests the FTC with authority to regulate activities constituting “unfair competition.” The FTC argues that non-compete agreements constitute “unfair competition” as they improperly restrain competition in labor markets, suppress innovation, and reflect unequal bargaining terms between businesses and individuals.
Opponents argue that the FTC has exceeded its authority and the Rule represents an improper and unconstitutional assumption of power by an unelected federal agency. Whichever position prevails, the Rule sets aside long-held and carefully developed legal principles governing non-compete contracts in every state, all of which take into account the concerns that underlie the Rule. For example, Ohio law presumes non-compete agreements to be invalid restraints of commerce unless they protect legitimate business interests, which must generally include the protection of trade secrets and/or confidential business information.
Present Considerations. The Rule will not become effective for 120 days after publication, i.e., not before the middle of August 2024. And the Rule may be successfully challenged and never become effective. However, businesses should plan for a potential future without non-compete agreements. Considerations include:
- Evaluating Non-Disclosure and Confidentiality Agreements. All businesses should have signed agreements with employees that protect confidential business information, including trade secrets. These agreements should provide general protection but also articulate specific protection for relevant areas of the business.
- Reviewing Non-Solicitation Agreements. The Rule does not affect these agreements. However, the FTC argues that they may be viewed as de facto non-compete agreements when they “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.” As such, non-solicitation agreements should be narrowly drafted to ensure protection while avoiding overreach.
- Protecting Confidential Information. Whether or not the Rule survives, businesses must undertake careful and complete measures to protect confidential information. This includes NDAs with all employees. However, it must also include measures that ensure protection, including electronically stored information. Such protections range from the physical security of documents to ensuring plant visitors sign NDAs to having electronic security measures in place, including password security. With or without the Rule, courts will generally not protect information the business has not taken steps to protect.
Senior Executives. The Rule defines Senior Executives as employees charged with “policy making” who earn $151,164 per year or more. Senior Executive agreements entered into before the effective date remain enforceable. However, the Rule precludes enforcement of non-compete agreements with Senior Executives entered after the effective date.
Sale of a Business. The Rule does not apply to non-compete agreements associated with the “bona fide sale of a business entity.”
The FTC has published the rule in a 570-page document released here. https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf
The U.S. Chamber of Commerce lawsuit can be found here. https://www.uschamber.com/assets/documents/Complaint-Chamber-v.-FTC-E.D.-Tex.pdf