FTC Non-Compete Ban Attacked by Businesses: What You Need to Know about the Ban

On April 23, 2024, the Federal Trade Commission (FTC) announced a final rule banning employers from enforcing non-compete agreements against any non-executive employee (“Non-Compete Clause Rule”).  As suspected, business groups, including the U.S. Chamber of Commerce, worked quickly to file a complaint in the U.S. District Court for the Eastern District of Texas arguing that the FTC lacks the authority to promulgate rules that define unfair competition, violating the Administrative Procedures Act, and is limited to challenging anti-competitive practices. As we await the Court’s input and determination on issuing injunctive relief to stop implementation of the rule, here is what businesses need to know about the Non-Compete Clause Rule. 

1. Non-Solicitation Clauses are Still Permitted. Employers can still enforce narrowly tailored non-solicitation provisions that prohibit solicitation of employees and clients.  A well-crafted non-solicitation provision will be critical for employers to ensure key personnel are prohibited from working for a competitor with the intent to divert away business. 
2. Non-Disclosure Agreements are Still Enforceable. Non-disclosure agreements that do not effectively prohibit an employee from working for another business are permissible. It will be important to review confidentiality language to ward off challenges and ensure employers can effectively use their confidentiality language as a tool in fighting unfair competition. 
3. Agreements with Senior Executives Executed before the Rule’s Effective Date are Excluded. Existing non-competes with senior executives in a policy making position that earn total annual compensation of more than $151,164 are excluded from the Non-Compete Clause Rule. However, after the effective date, companies are banned from entering into new non-competes with senior executives. A Senior Executive is defined narrowly as someone with final policy making authority over decisions critical to the company and excludes advisory authority.  Implementation of this section of the rule will likely be heavily litigated. 
4. Sale of a Business is Excluded.  Non-compete agreements that are part of a bona fide sale of a company are still permissible.  However, these provisions should be tailored to comply with state law. 
5. Notice is Permissible. Employers do not have to revise and reissue their agreements but rather need to provide notice to employees that the specific non-compete provision is not enforceable.  This necessitates carefully reviewing restrictive covenant language to determine which language is prohibited by the Non-Compete Clause Rule. There is no express penalty for failing to provide the notice, but the FTC may use other remedial measures available to it. 
6. Prepare but Do Not Act Yet!Setting the litigation aside, the Non-Compete Clause Rule does not become effective for 120 days from its publication.  During this period, employers should carefully review any agreements with restrictive covenants to determine how their agreements could be affected by the Non-Compete Clause Rule’s implementation should it not be stayed by a court. 

PilieroMazza attorneys are here to assist you. If you need assistance reviewing your restrictive covenant agreements, please contact Nichole Atallah, Sarah Nash, or another member of PilieroMazza’s Labor & Employment practice group. 

Looking for practical insights on gaining a competitive advantage through a deeper understanding of the government’s compliance requirements? Check out PilieroMazza’s podcasts “GovCon Live!” and  “Clocking in with PilieroMazza.”