Huge news in the business and legal world arrived on Tuesday, April 23, 2024 when the Federal Trade Commission (“FTC”) voted 3-2 in favor to ban non-compete agreements between businesses and their workers (“FTC Rule”).
The highlights of the FTC Rule would include a ban on all new non-compete agreements for all workers. Moreover, businesses would be required to provide sufficient notice to both current and past employees that existing non-compete agreements are no longer binding and/or will not be enforced by the business. The latter provision is of particular importance because it confirms that the FTC Rule applies retroactively, meaning that even if a worker and a business/employer entered into a binding non-complete agreement prior to the effective date of the FTC Rule, even that agreement will now become null and void once the FTC Rule goes into effect. Of note, with respect to the retroactive application of the final rule for existing non-compete agreements, that provision does not apply to “senior executives” (more on this later). So, let’s unpack this.
What is a Non-Compete Agreement?
Let’s start with the basics. According to the FTC’s own definition, a non-compete agreement is “a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.”
Notice how the definition includes “worker” and not just “employee.” That’s because an employer or any business can enter into a non-compete agreement with any “worker” irrespective of whether that person is classified as an “employee” of the business, or rather, is an independent contractor. Thus, the FTC Rule also applies to all “workers” (with that senior executive exception), not just “employees” of a business. In fact, the FTC Rule defines “worker” to include employees, contractors, externs, interns, volunteers, apprentices, and sole proprietors, whether paid or unpaid.
Typically, the components of a non-compete agreement would include a “scope” limitation that prevents the worker from leaving the current employer and working (1) with a defined list of competitors, (2) for a business that conducts similar business, and/or (3) for a business that may compete within a certain geographical range. Moreover, the non-compete agreement will typically set forth a set period of time in which the agreement is binding upon the parties, typically something like a one year from the date of separation between the worker and the business. While these agreements were always subject to challenge, depending upon the terms, in Ohio especially, they are generally deemed enforceable if found to be “reasonable” in scope and duration. Again, this all changes with the FTC Rule.
What is the FTC and Does It Have the Power to Enforce Such a Ban?
Again, according to its own website, the FTC “enforces a variety of antitrust and consumer protection laws affecting virtually every area of commerce, with some exceptions concerning banks, insurance companies, non-profits, transportation and communications common carriers, air carriers, and some other entities.” As part of its enforcement and regulation powers, the FTC uses Section 5(a) of the FTC Act to “investigate and prevent unfair methods of competition, and unfair or deceptive acts or practices affecting commerce.” More importantly related to the FTC Rule, the FTC has the ability and power to “implement trade regulation rules defining with specificity acts or practices that are unfair or deceptive and the Commission can publish reports and make legislative recommendations to Congress about issues affecting the economy.”
So…Back to the FTC Rule and Its Components.
As alluded to above, the FTC Rule, at this point, has been voted on and passed by the FTC. From there, it is set to become “effective” 120 days after the FTC Rule is published (presumably 120 days from April 23, 2024). Now, that does not mean that the FTC Rule will actually take effect, especially without any delay. Indeed, there will certainly be litigation filed by various groups, probably within the next few days, seeking to stay, block or completely vacate the FTC Rule. Indeed, the U.S. Chamber of Commerce has already said that it will file a lawsuit to block the rule from taking effect. In other words… “there will be lawyers.”
But let’s assume the FTC Rule does become effective. If that happens, again, there are two major fallouts, separately by future versus past non-compete agreements:
Future Agreements
These will be banned in their entirety. Indeed, the FTC Rule effectively declares that non-compete agreements amount to an “unfair method of competition” and therefore, such agreements violate Section 5 of the FTC Act. Thus, once the FTC Rule takes effect, there will be a comprehensive ban on new non-compete agreements for all workers.
Past/Existing Agreements
According to Section 910.2(a)(1)(ii) of the FTC Rule, once the rule takes effect, existing non-compete agreements “are no longer enforceable after the final rule’s effective date.” This seems pretty clear on its face. Absent the “senior executive” exception (discussed in a minute), if you are a “worker” with a past/existing non-compete agreement, once the FTC Rule goes into effect, that non-compete agreement is now null and void (at least as to the “competition” part). One issue that remains to be defined is whether/how this will relate to other provisions that may be contained within a non-compete agreement – such as a non-solicitation provision, or provisions pertaining to trade secrets, client lists, etc. Do those provisions –if contained within the same non-competition agreement, now become void as well? Or does the contract theory of severability apply, meaning those provisions survive even if the non-competition provision is now void? Suddenly, the contractual construction of these agreements may become an issue.
Senior Executive Exception for Existing Non-Compete Agreements
Finally, we arrive at the Senior Executive exception. What does this actually mean? Well, the FTC Rule provides us with a definition, stating that a “senior executive” is a worker who meets the following requirements:
- Was in a policy-making position; and
- Received from a person for the employment:
- Total annual compensation of at least $151,164 in the preceding year, or
- Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or
- Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.
The FTC Rule then defines “policy-making position” as follows:
A business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.
Any Other Exceptions or Limitations to the FTC Rule?
Yes, there are a few and they are described in Section 910.3(a)-(c) of the FTC Rule:
Bona fide sales of business. The FTC Rule does not apply to a non-compete provision that is entered into by a person pursuant to 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.
Existing causes of action. The FTC Rule does not apply where a cause of action related to a non-compete clause accrued prior to the Rule’s effective date.
Good faith. It is not an unfair method of competition under the FTC Rule to enforce or attempt to enforce a non-compete provision, or to make representations about a non-compete provision, “where a person has a good-faith basis to believe that this part 910 is inapplicable.”
The “existing causes of action” exception is of particular note here. From the language of the FTC Rule, it appears that if a worker or business is engaged in litigation or has a cause of action that “has accrued” related to a non-compete provision, prior to the effective date of the FTC Rule, then that non-compete provision is not void under the Rule and presumably can still be enforced as part of that ongoing litigation or accrued cause of action.
What Should I Do if I Have Questions?
When seeking legal representation related to non-compete agreements, clauses or provisions, it is essential to consult experienced attorneys who focus on in employment law. The FTC Rule, even once it becomes effective, will be tough to navigate, as most new laws and rules are, because they will be subject to scrutiny, exceptions and generally, enforcement. Spitz, The Employee’s Law Firm stands out as a top choice for employees facing non-compete issues. Spitz offers free initial consultations to discuss the specifics of your case. Moreover, Spitz operates on a no-fee guarantee basis, ensuring that clients only pay if their attorneys win. This commitment to client satisfaction and success makes Spitz the go-to option for individuals seeking focused legal representation in non-compete cases.