You may have read the news on April 23 that the FTC issued a final rule banning all non-competition agreements on a federal level. The reasoning is that the FTC views a non-compete as an unfair method of competition, having the result of suppressing worker wages, reducing worker mobility, hindering innovation and entrepreneurship, and harming fair competition in the labor market.

Key components

The rule is scheduled to go into effect on September 4, 2024 ….but business owners need to be aware of the key components now:

• A non-compete is defined as a post-employment restriction that:

o  prohibits a worker from seeking or accepting work with a competitive employer;

o  prohibits a worker from starting a competitive business; or

o  penalizes a worker by making a payment to the worker, such as a severance, contingent on non-competition.

• The rule bans nearly all non-competes that apply after a worker has ended employment, regardless of whether the worker resigned or was terminated by the employer.
• The rule applies to nearly all employees AND independent contractors.
• The length of the existing non-compete is irrelevant – any restriction will be prohibited.
• The rule bans future non-competes and renders existing non-competes unenforceable.
• A requirement that a worker re-pay the employer for training costs might be prohibited under the rule.
• The rule does not affect an employee’s legal obligation to refrain from competitive activity while still employed.
• The rule supersedes any individual state’s non-compete law unless that state law is more restrictive. 

o  In Arizona, the law governing non-competes is NOT more restrictive, so this rule would apply.

Written Notice Required

The new rule is retroactive and requires that an employer provide written notice to every employee or independent contractor with whom the employer has a non-compete agreement that the non-compete is no longer enforceable. This notice must be given BEFORE the rule is effective. Please call if you’d like assistance with this.

Exceptions

There are several exceptions to the rule:

• In the bona fide sale of a business, it is still permissible to restrict the Seller from competing against the Buyer for an agreed upon length of time and geographic area.
• For senior-level executives earning total compensation of at least $151,164 and who are in policy-making roles, non-competes signed before the rule takes effect will be enforceable.
• A franchisor’s non-compete agreement with a franchisee is still enforceable (since a franchisee is not a “worker”).

What Protections Remain?

Without the protection of a non-compete agreement to keep your departing workers from competing against your company, there are still protections you can put into place now. 

• Employers are not restricted from seeking non-solicitation agreements, pertaining to their employees and their customers, with their workers.
• Confidentiality provisions, related to the employer’s confidential information and trade secrets, are fully enforceable as a departing worker does not have the right to disclose this information, whether or not their future employer is considered competitive.
• Additionally, an arrangement known as “garden leave” is not prohibited. Garden leave is a post-employment arrangement where the worker’s job duties may be significantly or entirely curtailed but she continues to receive salary and benefits for the period of time she is prohibited from taking a competitive role. 

Immediate Legal Challenges

The US Chamber of Commerce immediately challenged the rule by filing a lawsuit in the U.S. District Court for the Eastern District of Texas arguing that the FTC does not have legal authority to issue binding regulations that prohibit unfair methods of competition. Other challengers claim that the rule is unconstitutional, arbitrary, and capricious. The possible outcomes of these lawsuits could be that the rule is declared invalid entirely, perhaps declared invalid as to the plaintiffs in those cases only, or declared valid and enforceable as of September 4 or another date.

What Should an Employer Do?

While any legal challenges remain, it is unclear if the rule will become effective on September 4, 2024 or if it will be invalidated.  It is also unclear if any rule that does eventually take effect will be modified from this current rule.  Watch for news about this and act accordingly. If it appears that the rule will become effective, any company with current non-competes will have to immediately provide written notice of unenforceability.

Please give me a call if you’d like assistance with any of the following:

• Reviewing and modifying current employment or contractor agreements
• Adding to or amending your non-solicitation provisions as they relate to your customers and your workers
• Enhancing the protection afforded by non-disclosure obligations for confidential and trade secret information
• Considering an alternative restriction, such as garden leave, for departing workers in key roles
• Determining if one of the exceptions applies to your situation
• Drafting the required written notice that all existing non-competes are unenforceable

So…are non-competes really banned? Perhaps. Read my articles for future updates.

NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.

By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC

480-825-4509

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