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FTC Bans Non-Competes…

A message with commentary regarding the recent final regulations from the Federal Trade Commission (FTC). Bear in mind, this ruling affects non-competition agreements which are generally considered separately from non-solicit, non-disclosure, and confidentiality agreements that many of us have with our employees. 

Best Regards,
Jason

Dear Friends and Clients:
 
Recently the Federal Trade Commission (“FTC”) announced a final regulation under the Federal Trade Commission Act to prohibit the use of employer non-compete agreements nationwide. We previously wrote to you when the FTC announced its proposed rule over a year ago. In its summary of the final regulation, although the FTC effectively bans all employment non-compete agreements, the FTC explains that the final rule created a narrow exception allowing existing non-compete agreements with “senior executives” to remain in force, defining those “senior executives” as those earning more than $151,164 annually, provided that they are in “policy-making positions.” Still, the FTC rule bars employers from entering into any new non-compete agreements with these “senior executives,” and, contrary to the proposed rules, employers have no duty under the final regulation to modify existing non-compete agreements by formally rescinding them. Instead, employers will be obligated under the regulation to provide written notice to each and every employee with whom they have a non-compete agreement, notifying those employees that the agreement will not be enforced against them in the future. The final regulation provides model language for employers to use to comply with this requirement. The FTC’s final regulation also incorporates the proposed rule’s exception that allows for the enforcement of non-compete agreements entered into in connection with the sale of a business. 
 
The final regulation is scheduled to take effect 120 days after the publication of the final regulation in the Federal Register, which occurred on May 7, 2024. (text of the publication: https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule AND https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf)
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Nothing in the FTC’s final regulation prohibits the use of employment confidentiality, trade secret, intellectual property, non-disclosure, and non-disparagement agreements, so long as they do not have the practical effect of prohibiting an employee from engaging in fair competition.
 
While the publication of the FTC’s final regulation prohibiting employment non-compete agreements will send shockwaves throughout the entire business community, we expect it to have a similar effect on litigation. The final regulation will result in multiple lawsuits filed against the FTC in multiple jurisdictions, each of which will seek to have the regulation enjoined from taking effect and, ultimately, struck down as an administrative overreach that goes way beyond any statutory authority that Congress ever granted to the FTC through the enactment of federal law. We think litigants challenging the final regulation are likely to be successful in obtaining an injunction. After all, non-compete agreements have been the subject of legislation and regulation by the states for the entirety of their existence, and nothing in the FTC’s enabling statute or any empowering legislation ever vested FTC with any explicit authority to change that.
 
In the meantime, however, employers will find themselves in a precarious position with regard to the implementation of new non-compete agreements and the enforcement of existing non-compete agreements. Nothing prohibits the use of these agreements as usual prior to the effective date of the FTC final regulation—again, 120 days after its publication in the Federal Register. So employers will have until sometime in late August to make final decisions about whether or how to comply with the FTC’s final regulation, while legal challenges to the implementation of the regulation play out. If the use of employment non-compete agreements continues to be important to your business, we encourage you to take a wait and see approach before changing your current business practices.

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