This week, the Federal Trade Commission banned the future use of non-compete agreements and clauses. Crucially, it also renders most non-compete agreements and clauses existing on or before the effective date of such ruling unenforceable; unless, however, such agreement or clause falls within one of the narrow exceptions to the overriding rule.
Attorney Mary Kate Clem provides a summary of the FTC’s latest ruling and how it may impact your current and future business practices and agreements. If you have questions or need any legal advice regarding the enforceability of your existing non-compete agreements and clauses, how to negotiate current and future employment and business agreements, Block & Scarpa is ready and able to help.
FTC’s Ruling and Reasoning
In a 3-2 vote held on April 23, 2024, the FTC issued a final rule banning non-compete agreements and clauses outright, which includes those agreements and clauses executed prior to the issuance of this ruling.
The FTC’s intent in enacting this new federal regulation focuses on the aim of protecting workers’ flexibility in leaving jobs and seeking other employment in the same field, encouraging business innovation and new ideas, increasing the formation of new businesses, and ending the practice of unfair restraints on competition. The FTC posits that lifting the restrictions imposed on workers by non-compete agreements and clauses will have the following positive results:
- Growth of new business formation by an estimate of 8,500 new businesses annually.
- The average worker will receive higher earnings by an estimate of $524 per year per worker.
- Health care costs will be reduced by an estimate of $194 billion cumulatively in the next decade.
- Innovation resulting from the removal of competition restraints will cause an increase of around 20,000 more patents per year in the next decade.
- A decrease in unfair market concentration and high prices for consumers that were heightened due to restrictive non-compete agreements and clauses.
This new ruling is the FTC’s solution for certain exploitative practices and stifling situations created by non-compete agreements and clauses whereby workers subject to such restrictions often faced being forced to remain in unsuitable employment relationships because of the insurmountable financial, temporal, and other costs they would incur if they opted to leave such employment. Prior to this ruling, workers were confronted with great limitations and struggles, including far diminished job selections, typically for a less lucrative job in an unfamiliar field, relocating outside of the applicable geographic restriction area, and, potentially, having to expend significant attorney’s fees to defend themselves from litigation instituted by their employer to enforce the non-compete restrictions.
Application and Implementation of FTC’s Ruling
The FTC’s final ruling will become effective one hundred and twenty (120) days after the rule is published in the Federal Register, publication of which is expected to occur within the next few weeks.
Existing Non-Compete Agreements and Clauses: Pursuant to the FTC’s ruling, most non-compete agreements and clauses existing on or before the effective date of the rule will be voided and unenforceable going forward. The rule requires employers to send individualized written notice by the effective date of the ruling to any worker with an existing non-compete agreement or clause informing the worker that those non-compete restrictions will no longer be enforced against them.
There is, however, an exception to this rule whereby certain non-compete agreements and clauses involving “senior executives” will remain in full force and effect until terminating on their natural expiration date as set forth in the existing agreement or clause. The FTC defines “senior executive” as an employee who is in (1) a policy making position, and (2) had a total annual compensation of at least $151,164 in the preceding year. Employers can neither alter these existing agreements or clauses to extend the term of the restrictions, nor enter into new non-compete agreements or clauses with these senior executives. Stated differently, this is a limited exception for existing non-competition agreements or clauses, making any new non-compete agreements or clauses executed with senior executives after the effective date of the final ruling void and unenforceable.
New Non-Compete Agreements and Clauses: Unless otherwise excepted (described hereafter), any non-compete agreement or ban executed after the effective date of the final ruling will be deemed a method of unfair competition in violation of the FTC’s regulations, and such restrictions shall be void and unenforceable.
Exceptions to the Rule
It is important to note that the FTC carved out two limited exceptions to its comprehensive ban on non-compete agreements and clauses, where such ban does not apply in the following situations:
Bona Fide Sale Exception: If there is a “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets,” then non-compete agreements or clauses executed in connection with such purchases and sales shall be enforceable—those existing prior to the effective date and those executed after the effective date of the FTC’s final ruling.
Violations of Existing Non-Compete Agreements and Clauses: Causes of actions related to non-compete agreements and clauses existing prior to the effective date of the FTC’s final rule may still be enforced and pursued provided the violation occurred prior to the effective date of the FTC’s final rule.
Going Forward
While the FTC’s ruling is certainly beneficial for workers and is expected to usher in positive impacts on business innovation and diversity, there are serious implications to the business practices, agreements, and decisions that employers and buyers and sellers of businesses, for example, must consider and adapt to. Despite potential implementation delays and impending legal challenges targeting the FTC’s authority to issue such ruling, it is important that employers and businesspeople are aware of this new regulation and govern themselves accordingly to avoid any incidences of noncompliance.
