NEW FTC RULE PROHIBITS NON-COMPETITION CLAUSES

The Federal Trade Commission has published a new Rule today, May 7, 2024, which prohibits non-competition agreements.  The final Rule is broad in its application, but as might be expected will leave areas of ambiguity. The FTC has a broad scope of authority with regard to business enterprises.  Some states already ban these agreements in most situations, and others limit them so as to exclude line employees. However, the impact of the Rule will be extremely broad.  By its estimation there are over 100 million workers affected that are covered by non-competition agreements.

The new Rule (16 CFR Part 910) is short as these things go. Still, that does not necessarily mean that it will be simple in its application.

The Rule will take effect 120 days after publication. Inevitably there will be challenges to the Rule, meaning that its ultimate effect may be unclear for quite a while.

The Rule provides for the following:

1. Non-compete language which has the effect of preventing an employee from taking another job or starting their own business is prohibited with few exceptions. This could mean that a non-solicit clause or non-disclosure clause which is too broad may run afoul of the Rule.  As written, there is no guidance on this point in the body of the Rule.
2. Existing non-competes are deemed void as of the effective date of the Rule. Moreover, employers are required to provide notice to their employees with non-competes (model language is provided by the Rule) that their agreements are no longer valid.
3. Exceptions to the Rule are narrow and are as follows:

• Senior executives going forward are governed by this Rule to the extent that non-competes are prohibited after the effective date of the agreement. Senior executives must earn in excess of $151,000 and have significant authority over the business.
• Existing litigation is not affected.
• Sale of an ownership interest of all or substantially all of the enterprise’s assets.

Enforcement of this Rule by the FTC will certainly be a challenge with so many non-competes outstanding. Taking that into account, along with the likelihood that challenges will stretch out for a long period of time, create a quandary for employers as to sending out the notice required by the Rule.

This article was written by Marc G. Tarlow, Esquire.  The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.