As you might be aware the Federal Trade Commission (FTC) issued its final Rule banning most post-employment non-competition provisions on April 23, 2024. While the Rule on its face applies to all business entities in the United States, the Rule does not apply to those entities that are not subject to the FTC’s jurisdiction, such as non-profits.
There are many aspects of this Rule that we will discuss below, but the first thing to know is that the Rule is not yet in effect. The FTC Rule will not become effective until, at the earliest, September 4, 2024 (Effective Date), i.e., 120 days from its May 7, 2024 publication in the Federal Register. There have already been legal challenges to the Rule, including a lawsuit filed in the United States District Court for the Northern District of Texas which seeks to prevent the Rule from becoming effective and claims that the FTC exceeded its authority in enacting the Rule. We will be monitoring the litigation closely and will keep you apprised of any material updates. Until the Rule becomes effective, the enforceability of non-competition provisions will continue to be governed by state law.
KEY ELEMENTS OF THE RULE:
- After the Effective Date, no new post-employment non-competes can be entered into with any worker, which includes not only employees, but also independent contractors, interns, and volunteers. This ban is regardless of compensation, title or seniority. This means even senior executives can no longer be asked to sign a non-compete that is effective post-employment.
- Nothing in the Rule affects non-compete obligations during employment.
- The Rule does not affect the enforceability or validity of other restrictive covenant provisions like non-solicitation and confidentiality obligations, as long as they are not so broad as to constitute a non-compete.
- The only non-competes that can be entered into after the Effective Date of the Rule under federal law are those entered into in connection with a bona fide sale of a business, a sale by a person of its ownership interest in a business entity (100% of such person’s ownership interest) or the sale of all or substantially all of the assets of a business. Please note, however, that if applicable state law has further restrictions on non-competition provisions in connection with such sales, the state law would still apply.
- As to post-employment non-competition provisions that are already in existence as of the Effective Date of the Rule:
- Such non-competition provisions are only enforceable for “senior executives,” which is very narrowly defined as a person in a “policy-making position” earning at least $151,164 per year (which can include commissions or non-discretionary bonuses). A person in a “policy-making position” means (i) entity’s president, CEO or equivalent; (ii) other officers who have policy-making authority, which means having the final authority to make policy decisions that control significant aspects of the business, but not merely advising or having influence over such decisions; or (iii) or other natural person who has the same policy-making authority.
- For everyone else – whether current employees or separated employees for whom a non-compete is still in effect – their post-employment non-competition provisions are no longer enforceable.
- Critically, a notice must be sent no later than the Effective Date notifying all persons – whether current employees or former employees – with existing non-compete obligations (except senior executives) that their non-competition obligations are no longer enforceable and explicitly informing them that they may compete. The Rule includes model language for such notice, and we are happy to help clients navigate this notice requirement when the time comes.
- The Rule purports to preempt conflicting state laws except those state laws that are more restrictive than the Final Rule.
While we do not yet know whether the legal challenges to the Rule will be successful, we are operating under the assumption that the Rule will go into effect in September and recommend that our clients do so as well. We urge you to review your own employment agreements to ascertain whether the Rule will affect you or your company. For our corporate clients, we strongly recommend that you consider whether your existing agreements with senior executives are satisfactory prior to the Effective Date of the Rule.
If you have any questions or concerns about the FTC Rule or any other employment matter, please do not hesitate to contact Jocelyn Jacobson (jjacobson@reitlerlaw.com) or Julie Wlodinguer (jwlodinguer@reitlerlaw.com).
