Executive Summary: On April 23, 2024, the Federal Trade Commission (FTC) issued its long-awaited final rule, banning virtually all noncompetition agreements between employers and workers. Just as the ink dried, the first lawsuit (of several anticipated cases) challenging the final rule was filed, and now many employers are left to wonder what to do next. The final rule goes into effect 120 days after it is published in the Federal Register. The purpose of this Legal Alert is to 1) summarize the most important aspects of the final rule and 2) provide guidance to employers on how to navigate their existing agreements during this uncertain time.
What the Final Rule Does
The FTC determined that an employer entering into a noncompetition agreement with any worker after the effective date of the final rule (120 days after the final rule’s publication in the Federal Register) violates Section 5 of the FTC rule. This includes noncompetition agreements contained in equity plans, severance agreements, and stock option agreements.
The FTC rule also prohibits employers from enforcing noncompetition agreements existing after the effective date of the final rule against workers who are not “senior executives” (defined below). Employers also must provide notice to workers with existing noncompetes that they are no longer enforceable—similar to what California state law already requires. The FTC has provided a form of this notice in the final rule.
Note, to the extent that enforcement of an existing noncompete is not barred by the final rule, state law related to the enforcement of such agreements is not superseded by the final rule. In other words, any existing noncompetes not banned under the final rule will still be required to comply with state law to be enforceable.
What the Final Rule Does Not Do
The final rule does not prohibit employers from entering into or otherwise enforcing other agreements with workers such as nonsolicitation agreements, nondisclosure/confidentiality agreements, or return of property agreements. However, the final rule also recognizes that those types of agreements could be so overly broad that their practical effect creates a noncompete (particularly when the practical effect prohibits the worker from being employed in certain jobs). Employers may also still seek to hold departing employees responsible for violations of state law regarding misappropriation of trade secrets or misuse of computer systems.
The final rule does not prohibit certain noncompetes related to the sale of a business.
The final rule does not prohibit employers from enforcing existing noncompetes against “senior executives.” A senior executive is defined as a worker who was in a “policy making” position and earned at least $151,164 annually. Because that term is not defined by the rule, we expect that if this final rule becomes law, what is or is not “policy making” will be much debated in the court system for years to come.
So What Can Employers Who Have Existing Noncompetes Do Now?
Stay calm. The final rule has already been challenged in the court system, and we expect more lawsuits to be filed in the coming weeks. It would not be surprising if a federal judge enjoins the final rule from taking effect before the 120-day period ends.
Communicate to your employees with existing noncompetes that this final rule is being challenged in the courts, and all other post-employment restrictive covenants will remain in full force and effect regardless of the outcome of these court challenges.
Review your existing agreements to ensure that those other existing, post-employment covenants are strong, yet narrowly tailored to protect your legitimate business interests, including the protection of your confidential information and customer goodwill. We are expecting considerable push-back from state court judges and counsel moving forward on the enforceability of these types of restrictive covenants given this final rule. If your nonsolicitation clauses restrict employees from soliciting any customer or potential customer of the company (regardless of the employee’s connection to that customer), you may want to consider updating them (but be sure to consult with an attorney first).
Work with your Human Resources and IT departments to develop comprehensive policies and procedures for when high-level employees and sales employees depart your organization to ensure that the confidential information you wish to protect is secure and not accessible to the departing employee. If not in place already, you may want to consider using Termination Certifications, which remind employees of their obligations to the company at the time of departure, and have the employee confirm that the employee has returned all company information in all formats and media.
If you have any questions about the FTC’s final rule regarding noncompetes, we encourage you to consult with an attorney who regularly practices and consults with clients on the enforceability of restrictive covenants, such as the authors of this Legal Alert, Dallas partner Rachel Ullrich, rullrich@fordharrison.com, Atlanta partner Jeff Mokotoff, jmokotoff@fordharrison.com, Co-Chair of FordHarrison’s Non-Compete, Trade Secrets and Business Litigation practice group, Berkeley Heights partner Mark Saloman, msaloman@fordharrison.com, Co-Chair of FordHarrison’s Non-Compete, Trade Secrets and Business Litigation practice group, and Spartanburg partner Jeffrey Lehrer, jlehrer@fordharrison.com. Of course, you can also contact the FordHarrison attorney with whom you usually work or any member of our Non-Compete, Trade Secrets and Business Litigation practice group. This is a developing area of the law which we are monitoring closely and will provide regular updates as needed.