NEW FTC Rules May Nearly Eliminate Non-Compete Provisions
Non-competes are widespread in both employment agreements and severance agreements as well as independent contractor agreements. The Federal Trade Commission (the “FTC”) estimates that one in five workers are subject to non-compete provisions.
In April 2024, the FTC finalized a rule that will largely ban non-compete provisions as of September 4, 2024 (the “Rule”). While the new Rule has already been challenged in several jurisdictions, the jury is still out as to whether it may result in a very different approach to post-employment/contractor restrictions.
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While at least one federal court in Texas has entered a temporary order finding the Rule unconstitutional (in addition to a recent unrelated Supreme Court case handed down in July), employers are currently left uncertain as to how the Rule will impact them and what they should do in the meantime.
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On its face, the Rule addresses restrictions that would prevent an employee or contractor from working for competitors after their current employment ends. For the most part, the Rule would not impact less restrictive provisions, like non-solicitation of customers, non-solicitation of employees, confidentiality provisions and traditional trade secret protections. There is a small carve-out for senior executives (estimated to represent less than 0.75% of workers) already bound by non-competes, but the Rule will ban employers from entering into or attempting to enforce any new non-competes--even if they involve senior executives. Additionally, the Rule allows for non-compete provisions entered into in the context of a sale of a business…an exception historically noted nearly universally under most State laws. Importantly too, from a timing perspective, the Rule would not apply to instances of non-competes violated before September 4, 2024, the date that it becomes effective.
If the Rule survives current and future legal challenges, pragmatically speaking, employers will have to place more emphasis on less restrictive post-employment provisions. In many cases relying on well drafted confidentiality and non-solicitation of customer provisions. For those instances when an employer believes that non-compete provisions are absolutely needed to protect the business, the Rule would not prevent Garden Leave provisions (i.e. keeping an employee on the payroll with no role or responsibilities to prevent them working for a competitor). This is not an uncommon practice in the EU.
For now, employers should know that non-compete provisions in existing and new employment, severance or independent contractor agreements may be subsequently unenforceable (with respect to those terms) when and if the Rule becomes effective, and may require that clear and conspicuous notice of non-enforceability be sent to all parties to such contracts.
All Rise Legal Counsel will continue to monitor the challenges to the Rule and will provide updates when there is additional clarity as to its future, as the September 4th application date approaches.