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Coping With the FTC Ban on Non-Competition Agreements

Bryan D. Harrison

Bryan D. Harrison | Attorney View more articles

Bryan is a member of our Litigation Practice Group

Photo credit: Mikkelwilliam via Getty Images

On April 23, 2024, the Federal Trade Commission issued its long-expected non-compete ban (the “Rule”). The Rule, which is scheduled to go into effect on September 4, 2024, will ban nearly all non-competes across the country. However, multiple entities have sued the FTC to prevent the rule from ever going into effect. This article will briefly summarize the Rule, exceptions to the Rule, and the legal challenges to the Rule. The article will then discuss steps that employers can take to prepare, including shoring up their trade secret policies.

The Rule

Starting on September 4, 2024, the Rule will ban employers from entering into non-competes with its employees and void existing non-competes subject to certain exceptions, as noted below.

Specifically, the Rule provides that “it is an unfair method of competition for a person: (i) To enter into or attempt to enter into a non-compete clause; (ii) To enforce or attempt to enforce a non-compete clause; or (iii) To represent that the worker is subject to a non-compete clause.” Employers must provide notice to employees with existing non-competes that employee’s “non-compete clause will not be, and cannot legally be, enforced against” the employee. Companies will be required to provide the requisite notice before September 4, 2024, and can provide the notice via mail, email, or text. The Rule provides model language that employers can adopt.

It is important to note that while the Rule does not explicitly prohibit non-solicit clauses, if a non-solicit has the effect of preventing competition (e.g. prohibiting solicitation of two customers in a two-customer market), such a clause would fall within the confines of the Rule. The Rule also does not prevent employers from protecting their trade secrets against an employee that leaves to compete.

In addition, although the rule banning non-competes is intended to start on September 4, 2024, an employer will still be able to bring a cause of action in court after September 4, 2024, as long as it is for breach of a non-compete agreement that was entered into before that date, and so long as the alleged breach occurred before September 4, 2024.

Exceptions to the Rule

The Rule provides certain exceptions. The rule excludes existing non-competes with “senior executives.” A senior executive is an employee who is in a “policy-making position” and earns at least $151,164 per year. The rule defines “policy-making positon” as “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”

The Rule also provides exceptions for non-competes entered into in connection with the bona fide sale of a business or in the context of a franchisee-franchisor relationship.

Legal Challenges to the Rule

There have been at least three challenges to the rule, two in Texas and one in Pennsylvania. One of the Texas cases, Ryan LLC v. FTC, is proceeding first in the United States District Court for the Northern District of Texas. The primary argument in the Ryan LLC case is that the FTC lacks the authority to issue a rule banning non-competes. The U.S. Chamber of Commerce has joined that suit as an intervenor and, on June 12, 2024, filed a reply brief in support of a motion to stay the effective date of the Rule pending the outcome of the litigation. The Court stated that it will issue a decision by July 3, 2024.

What Can Employers Do Now?

With a ruling from the North District of Texas expected two months before the rule is scheduled to go into effect, employers will have time to comply with the Rule, should that be necessary after the court’s ruling.

In the meantime, though, there are a number of steps employers can take, both to prepare for the effective date and, more generally, as good business practice.

  • First, employers should survey all agreements to determine whether, and to what extent, the company has express or implied non-compete clauses.
  • Second, employers should consider entering into non-competes with senior executives now because Rule will not void non-competes with senior executives that were entered into prior to September 4.
  • Third, employers should shore up their existing trade secret and confidential information policies. A helpful checklist that employers can use to help build or strengthen their trade secret program is available here.

For more information about the Rule, how it may affect your business, or how to better protect your trade secrets, please contact one of the members of our Trade Secret Litigation team.

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