The Essentials of the FTC Non-Compete Clause Rule

Veronica Bayo Clifford | Esq. | | Published: Issue 2 2024

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Many of you have heard about the latest Federal Trade Commission (“FTC”) Non-Compete Clause Rule. The rule is self-explanatory and is only about seven to eight pages in length. The FTC’s supplementary information rule report, however, evidences the rule’s actual complexity and totals 570 pages. 

On April 23, 2024, the FTC voted to ban all non-compete agreements and to invalidate existing non-competes with exceptions. Even the act of making it seem as if an employee is subject to a non-compete is prohibited. First proposed in draft form in January 2023, the Non-Compete Clause Rule (“rule”) is substantially the same as the initial rule. 

The rule was developed under the simple premise that non-competes hurt workers and harm competition in violation of Section 5 of the Federal Trade Commission Act (FTC Act). Section 5 of the FTC Act authorizes the agency to enact rules aimed at preventing businesses from using “unfair methods of competition.” The FTC estimates the rule will stimulate new business growth by 2.7% per year. It also contends the rule will result in higher earnings for workers, lower healthcare costs, and increased innovation. 

The rule applies to anyone who works for a for-profit employer, whether paid or unpaid, and to independent contractors. It covers all veterinary practices, clinics, and hospitals, unless the business is established as a not-for-profit entity, and it prohibits employers from entering new non-competes with any of its employees. The rule also prohibits employers from enforcing existing non-competes with workers other than senior executives (which the FTC estimates is less than 1% of affected workers). It defines “senior executives” as workers earning more than $151,164 and who are in a “policy-making position.”  

The FTC defines “policy-making position” as any of the following:

(1) a business entity’s president,  

(2) chief executive officer or the equivalent,  

(3) any other officer of a business entity who has policy-making authority, or  

(4) any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.  

As an exception to the rule, existing non-competes with senior executives can remain in force. 

Keep in mind that the FTC’s definition of a non-compete clause is broad and includes both express non-competes and terms purporting to bind a worker that have the same functional effect as non-competes. Two examples of contractual terms that may act as functional non-competes: (1) an NDA or confidentiality agreement between an employer and a worker written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer; and (2) a training-repayment agreement (“TRAP”) that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred to train the worker. NPRM, proposed § 910.1(b)(2). Another practical example would be a term in an employee handbook stating that workers are prohibited from working for certain types of firms or in certain fields after their employment ends. 

Note that the rule does not prohibit exclusivity agreements, non-solicitation agreements, or confidentiality agreements. However, if the non-solicitation agreement is too broad and prohibits an employee from working in a specific geographic area, it may be determined to be a de facto NCA and will be unenforceable. 

The FTC’s Guide for Businesses and Small Entity Compliance outlines 3 steps for compliance with the rule. Step 1 is to ensure that no non-competes are included in future employment contracts, paperwork, or websites. For purposes of this step, “paperwork” includes employee handbooks and workplace policies. 

Step 2 encapsulates the rule’s notice requirement. Employers will now have an affirmative obligation to notify employees subject to existing and active non-competes that they are no longer enforceable. This includes current as well as former employees but does not apply to senior executives.  

The notice must identify the person who entered into the non-compete clause with the worker and “be on paper delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker.” §910.2(2) (i-ii). Helpfully, the rule provides model language for these mandatory notices. 

Finally, at Step 3, the guidance instructs that existing non-competes should not be enforced against workers other than senior executives. 

The rule provides for exceptions, including non-compete clauses entered by a person pursuant to a bona fide sale of a business entity. Another exception is where there is a cause of action related to a non-compete clause accrued prior to the rule’s effective date. Significantly, the rule contains a “good faith” exception, which provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good-faith basis to believe that the final rule is inapplicable. 

The effective date of the rule is 120 days (about 4 months) after publication of the rule in the Federal Register. Barring an injunction or court ruling extending the date, the rule is scheduled to take effect on September 4, 2024.  The rule, however, is already being challenged on the grounds of unenforceability and whether the FTC has the authority to even enact such a rule. In short, it is unlikely the final rule will go into effect anytime soon. Nevertheless, it is a good idea to start identifying employees currently subject to non-competes and to review existing agreements in light of the rule. Stay tuned!

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