New FTC Rule Bans Non-Compete Agreements in All Employment Contracts | Insights

The Federal Commerce Fee (FTC) issued a brand new rule on April 23, 2024, banning new non-compete agreements in all employment contexts. The extremely anticipated rule, which was first proposed in draft type in January 2023, is anticipated to have important impacts on employers in a large swath of industries who’ve historically relied on non-competes to guard firm secrets and techniques and mental property, in addition to to encourage funding in employee coaching. It’s going to face sure challenges from the U.S. Chamber of Commerce and different teams, and whether or not it in the end is enforced by a court docket stays to be seen.

Background

The rule comes on the heels of a 2021 govt order from the Biden Administration encouraging businesses to enact a “complete authorities” strategy to encouraging competitors. Following the order, the FTC introduced its intention to reinvigorate Part 5 of the FTC Act, which authorizes the company to stop companies from utilizing “unfair strategies of competitors.” In a press release in help of the rule, Chair Lina Khan mentioned that “[t]he freedom to vary jobs is core to financial liberty and to a aggressive, thriving economic system” and that “[n]oncompetes block staff from freely switching jobs, depriving them of upper wages and higher working situations, and depriving companies of a expertise pool that they should construct and increase. By ending this apply, the FTC’s proposed rule would promote higher dynamism, innovation, and wholesome competitors.” Employers and others have strongly opposed the rule, asserting that the FTC doesn’t have the authorized authority to manage competitors on this method and that the rule “opens up a Pandora’s field the place this fee or future commissions could possibly be actually micromanaging each side of the economic system.”

As handed by the FTC’s Commissioners on a 3-2 vote amongst partisan traces, the rule applies to anybody who works for a for-profit employer, whether or not paid or unpaid, and to unbiased contractors. Particularly, the brand new rule prohibits employers from coming into into new non-competes with any worker, together with senior executives (which is a change from the proposed rule), or representing to any worker that the worker is topic to a non-compete.

Employers might proceed to implement current non-competes with senior executives. Employers should notify all different present and former staff that any current non-competes are not enforceable earlier than the rule goes into impact. Employers looking for to supply discover might depend on mannequin language included within the rule to fulfill the discover obligation and people who do are granted a “protected harbor” for compliance.

As a result of the FTC’s authority solely extends to for-profit companies, the rule won’t have an effect on employment agreements entered into by staff employed by nonprofit organizations. The rule additionally permits restricted use of non-compete agreements between franchisees and franchisors.

The proposed rule additionally doesn’t apply to non-competition agreements entered into by an individual in the course of the “bona fide sale of a enterprise,” of the particular person’s possession curiosity in a enterprise entity or of all or considerably all of a enterprise’s working property.

Conclusion and Takeaways

Employers lined by the rule ought to count on to face added complexity to the already multifaceted problem of hiring and retaining expertise. Shifting ahead, employers could possibly look to employment agreements utilized in states reminiscent of California, the place non-competes had been already unenforceable, for steering on restructuring their employment agreements to adjust to the brand new rule.

The brand new rule will turn into efficient 120 days after the FTC publishes it within the Federal Register. Lined employers have till the efficient date to return into compliance with the rule. The U.S. Chamber of Commerce has vowed to problem the rule in court docket, maybe as early as April 24, 2024, and thus whether or not the rule in the end is enforceable is but to be decided. There’s a sturdy chance that the district court docket that hears the lawsuit may have the flexibility to concern a short lived restraining order or preliminary injunction of the rule, which might delay the implementation of the rule whereas the problem to its validity performs out within the courts.

For extra data and steering on the FTC rule and its affect, contact the authors or one other member of Holland & Knight’s Labor, Employment and Advantages Group, Antitrust Crew or Client Safety Protection and Compliance Crew.

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