Federal Trade Commission Announces New Rule Banning Non-Competition Agreements

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    On April 23, 2024, the Federal Trade Commission (“FTC”) announced a ban on employment-related non-competition agreements.  The FTC argues that non-competition agreements “keep wages low, suppress new ideas, and rob the American economy of dynamism,” according to the FTC Chair Lina M. Khan.  The FTC has been hinting at its plan to place this nationwide ban for over a year. The U.S. Chamber of Commerce and other similar entities have already filed lawsuits, alleging that the FTC does not have the authority to prohibit companies from limiting their employees’ ability to work for rivals.

What are the current restrictions on non-competition agreements?

Prior to this rule, federal law did not address the enforceability of non-competition agreements. Rather, restrictions regarding non-competition agreements vary from state to state. California has the strictest bans and even imposes criminal penalties for entering into and enforcing a non-competition agreement, unless it falls under very narrow exceptions.  A lot of other states, such as Illinois and Massachusetts, do not have a full ban on non-competitions but have restrictions such as salary minimums and time limits.  Vermont does not have a general statute or regulation that governs non-competition agreements. Vermont courts will uphold a non-competition agreement so long as it is “reasonable and justified.”

What has the FTC changed?

After the effective date, employers will longer be able to enter into non-competition agreements with their workers or enforce most existing non-competition provisions. Employers must also provide explicit notice to both current and former employees that their non-competition provisions are no longer enforceable.

What is the notice requirement?

Employers must provide “clear and conspicuous” notice. It has to be provided in a digital format or on paper; oral notice does not work.

When does this go into effect?

This new rule goes into effect 120 days after the rule is published in the Federal Register.  The estimated effective date will be sometime in September 2024.

Are there any exceptions?

There are two exceptions to this new rule. The first is for senior executives who currently have non‑competition agreements with their employer. The FTC defined senior executives as workers earning more than $151,164 annually who are in policy-making positions.  Senior executives who have existing non-competition agreements prior to the effective date can be held to them. After the effective date, companies cannot enter into non-competition agreements with senior executives.  The second exception to the rule allows for non-competition agreements related to the bona fide sale of a business or the sale of an individual’s ownership interest in a business.

This rule also does not apply to non-solicitation, confidentiality, or invention assignment agreements. Those types of restrictive covenants are still enforceable.

What does this mean for employers?

Since the effective date is not until sometime in September 2024 and there is plenty of pending litigation against this new rule, employers should continue business as usual and can continue to include narrowly drafted and appropriate non-competition agreements in their onboarding process, especially with senior executives.  Employers should, however, have a plan ready for the effective date that includes sending out notice to all employees with a non-competition agreement and having alternatives to non‑competition agreements ready for new employees.

Here at Gravel & Shea, we will closely monitor the litigation associated with this decision and will provide more information as it becomes available.  We are well versed in helping employers find solutions and alternatives to non-competition agreements.  We can also help determine if the non-competition agreement falls under the few exceptions and can draft notices to employees regarding this new ban.

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