May 8, 2024 Navigating the FTC’s New Ban on Non-Compete Agreements

The FTC has approved a groundbreaking rule banning non-compete agreements. Employers must now navigate the compliance complexities.

By: Joshua Weiner, Esq.
Partner & Employment Group Chairperson – Lindabury, McCormick, Estabrook & Cooper, P.C.

On April 23, 2024, the Federal Trade Commission (“FTC”) narrowly approved a new rule effectively implementing a comprehensive ban on the use of employee non-compete agreements in the private sector. Since the FTC’s authority only extends to for-profit businesses, the rule will not affect non-profit organizations. The rule also does not apply to non-compete agreements entered into by a person during the “bona fide sale of a business” of the person’s ownership interest in a business entity or of all or substantially all of a business’s operating assets.

Impact on Current and Future Agreements

This ban will not only bar all future non-compete agreements, but it also similarly bans all current non-compete agreements except for those employees employed as “senior executives” (those employed “in policy-making positions” and earning at least $151,164 annually). Employers must notify all other current and former workers that any existing non-competes are no longer enforceable before the rule goes into effect. Employers seeking to provide notice may rely on model language included in the rule to satisfy the notice obligation and those who do are granted a “safe harbor” for compliance.

Legal Review and Enforcement Timeline

The final rule will become effective 120 days after publication in the Federal Register. If the final rule is deemed “significant” due to its economic impact or important policy implications, it undergoes a presidential-level review before being published in the Federal Register. Further, Congress and the Government Accountability Office will have an opportunity to review it before it takes effect. If both the House and Senate pass a resolution of disapproval and the president signs it, or if both houses override a presidential veto, the rule is void and cannot be reinstated in the same form without Congressional approval.

Given the likelihood of multiple lawsuits challenging its legality (as of the writing of this article, at least three such lawsuits have already been filed) the use and enforceability of employee non-compete agreements currently remains the sole domain of local and State law. However, all businesses should begin reviewing their current employee restrictive covenants to determine what portions, if any, should be appropriately revised considering the potential enforcement of this rule.

Implications for Businesses

While the rule bans non-compete agreements, it does not prevent businesses from entering into non-solicitation and/or non-disclosure agreements with their employees in order to protect valuable proprietary information such as trade secrets, customer information, and various intellectual properties. These types of restrictive covenants will still be enforceable so long as they are not overly broad and “function to prevent” a worker from seeking or accepting other work or starting a new business after employment ends. These agreements could be barred by the final rule, depending on the precise language and the surrounding facts and circumstances.

The law in most States recognizes an employer’s legitimate business interest in maintaining the confidentiality of their trade secrets and the business relationships and goodwill established with their customers and clients. Employers should take time to review their non-solicitation and non-disclosure agreements and amend them where necessary to continue enjoying the protections these agreements provide while not running afoul of the FTC rule.

Potential Legal Outcomes

For now, there remains a strong possibility that at least one of the three current lawsuits will result in the issuance of a temporary restraining order or preliminary injunction enjoining enforcement of the rule, which would delay its implementation while the lawsuits work their way through the court system. It is the opinion of this author that, notwithstanding the legitimate public policy debate regarding the enforceability of non-compete agreements, a court, at least temporarily, will enjoin enforcement of this new rule, in whole or in part, on at least one of the following grounds: (1) it exceeds the FTC’s statutory authority; (2) the ban on current non-compete agreements violates the Contract Clause of Article I, Section 10, Clause 1 of the U.S. Constitution; and/or (3) it was promulgated in violation of the Administrative Procedure Act. In the meantime, employers should begin reviewing their restrictive covenants and consult with employment counsel about what next steps, if any, they should take.

Joshua Weiner, Esq., is a partner with Lindabury, McCormick, Estabrook & Cooper, P.C. (www.lindabury.com). As chair of the firm’s Employment Group, he works with clients in litigated matters as well as administrative and arbitration proceedings, employment law preventive practices and audits, labor union law disputes, wage and hour claims, and management training. Based in Westfield, NJ, Lindabury serves clients, including prominent corporations and businesses, throughout the Mid-Atlantic region.

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