Federal Trade Commission to Ban Almost All Non-Compete Agreements
On April 23, 2024, the Federal Trade Commission (the “FTC”) voted to adopt a final rule (the “Rule”) banning nearly all non-compete agreements on the grounds that the underlying restrictions imposed on workers constitute unfair methods of competition, and thus are in violation of the Federal Trade Commission Act (the “Act”). The Rule is scheduled to be published in the Federal Register in the coming weeks and will become effective 120 days after its publication. However, at least two lawsuits have already been filed against the FTC pertaining to the Rule, so there is considerable uncertainty as to when, if ever, the Rule will take effect. Once effective, the Rule would impose a categorical ban on all future non-competes except in the context of the sale of a business and a limited exception for certain “Senior Executives.”
California law is already hostile towards most non-compete agreements, which are frequently deemed by courts to place unreasonable restrictions on workers’ rights to employment in the field and geographic location of their choosing. Again, the sale of a business is the most notable exception. The Rule adopted by the FTC would go even farther and ban almost all non-compete clauses. The limited exceptions are that the ban would not affect non-compete clauses already in effect between employers and certain Senior Executives as of the date time the Rule is enacted, and that non-compete clauses are permissible in agreements between buyers and sellers for the sale of a business.
Importantly, the Rule also requires employers to notify any current and former employees (excluding Senior Executives) still subject to a non-compete that their non-compete is no longer enforceable.
While the FTC’s non-compete ban would represent a major change to fair competition law and could have a major impact on businesses large and small, it seems unlikely that this Rule will have any immediate impact in the short term. So, businesses should not rush to take immediate steps to begin complying with the Rule’s requirements. Instead, they would be wise to monitor the ongoing legal challenges to know when and, if compliance, will be required.
Employers should keep in minds several alternatives to non-compete agreements that still enable them to protect their investments without having to enforce a non-compete. Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information.
If the FTC Ban on non-competes survives the legal challenges and does go into effect, employers may wish to undertake a careful review of existing employment agreements and related policies. VRS is available to answer questions on this subject and plans to update this article in future edition of business briefs.