On April 23rd, 2024, the Federal Trade Commission (FTC) announced its long-awaited rule intending to promote competition nationwide.
KingSpry’s Employment Law Chair, Avery E. Smith, Esq., and attorney Shorav Kaushik discuss what this new rule means for employers and what developments can be expected in the coming months challenging this new regulation.
Timeline
In January of 2023, the FTC proposed a rule banning non-compete clauses which was subject to the 90-day public comment period. The proposed rule drew over 25,000 comments in support of the ban, out of 26,000 comments total.
On April 23, 2024, the FTC ruled that pursuant to Section 5 of the FTC Act, non-compete clauses negatively affect competition in services and labor markets, inhibiting innovation. The new rule banning non-compete clauses is scheduled to go into effect 120 days after its publication in the federal register.
Intention of the Rule Change
The intention of this rule change was to motivate companies to increase worker compensation and working conditions in an effort to retain their employees, rather than relying on non-compete agreements. The FTC believes that this rule change will lead to more business creation and innovation.
Private companies will be prevented from entering into or enforcing contracts with their employees whereby the employees are prevented from either creating new companies that compete directly with their former employers or joining other firms that compete with their former employers. The FTC noted that existing non-compete agreements with executives (defined as those earning more than $151,164 annually and in policy making positions) could still be enforced, but all other non-complete agreements would not be enforceable. Companies are required to inform employees that non-compete agreements will no longer be enforceable.
In explaining its reasoning, the FTC pointed out that such agreements are already banned in California, Minnesota, Oklahoma, and North Dakota, and companies were able to protect trade secrets using non-disclosure agreements and retaining workers using wages and favorable working conditions.
The Rule Applies to Private Businesses. This change does not apply to businesses in the non-profit sector. Most educational institutions and medical providers, many of which use non-compete agreements with their professionals, will not be directly affected.
The Rule Change is Likely To Be Challenged
We anticipate that this rule change will lead to litigation, and enforcement of this rule may be enjoined prior to it coming into effect. Challenges will likely rely on the Supreme Court’s decision in West Virginia v. EPA, which held that “major questions” regarding significant policy decisions should be reserved to congress and not federal agencies. The U.S. Chamber of Commerce already filed a challenge in the Northern District of Texas on the date the new rule was released. Given the anticipated litigation, a stay of enforcement could be lengthy.
Key Takeaways
Although this rule change will likely be challenged, five states have already banned non-compete agreements. A bill banning non-compete agreements reached the New York State Governor’s desk several weeks ago but was vetoed. National private employers should anticipate a more restrictive environment in the future and should plan accordingly.
Employers should emphasize the use of non-disclosure agreements to protect trade and business secrets. Employers may also consider other employment arrangements, such as fixed term employment agreements with non-compete provisions during the employment period. The use of technology, such as monitoring employee actions on employer issued technology can also assist in the protection of trade secrets and IP. Finally, employers should consider structuring compensation in a manner that incentivizes employee retention, such as bonuses or deferred compensation plans.
