FTC Bans Non-Competes
Today, the U.S. Federal Trade Commission (FTC) voted 3-2 to issue a final rule banning non-competes nationwide for all workers and requiring employers to notify workers that they will not enforce them. Existing non-competes will also be unenforceable for most workers, with the exception of senior executives (defined as workers who are in a policy-making position and whose total annual compensation is at least $151,164), whose non-competes will remain enforceable if entered into before the final rule takes effect.
The final rule contains an exception for non-competes 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. Of note, unlike the initial rule proposed in January 2023, this sale of business exception is not limited to individuals who own 25% or more of a business entity.
Further Details on the Ban
The final rule will take effect 120 days after it is published in the federal register. Implementation, however, is uncertain, as we expect there to be legal challenges. We will continue to monitor the publication and progress of the rule.
FTC committee members advocating for the rule estimate that banning non-competes will result in reduced health care costs, new business formation, rise in innovation, and $400-$488 billion in increased wages for workers over the next decade. The FTC also found that employers have several alternatives to non-competes that still enable them to protect their investments, including trade secret laws and non-disclosure agreements.
The two dissenting committee members cited to the FTC’s lack of authority to pass legislation banning non-competes, the effect of having to nullify nearly 30 million existing contracts, and $400 billion in costs to employers for additional wages.
Steps Employers Can Take Now
Even if the final rule is not implemented, several states have already enacted their own laws banning or severely restricting non-competes, and we expect more states to follow. In addition, employers may face backlash from employees in trying to enforce non-competes following the publication of the final rule.
Therefore, while the future of the final rule is uncertain, employers should take the following steps to ensure their businesses are protected:
- Take inventory of your existing employment covenant agreements to ensure they contain adequate protections outside of non-competes, including non-disclosure provisions, non-solicitation provisions, and provisions governing the ownership and assignment of intellectual property.
- Ensure that your c-suite level employees have signed enforceable non-compete agreements.
- Ensure that your customer non-solicitation provisions are not so broad that they could be deemed to be an unenforceable non-compete.
- Assess the level of restrictions necessary to protect your business while allowing you to remain competitive in the market and attract new talent. A decreased tolerance for non-competes is likely even if the rule is not implemented.
The MMM Employment Team continues to monitor developments related to the final rule and will release an updated, more detailed legal update regarding its provisions, including the definitions and exceptions. For questions about the final rule, non-compete agreements, or other restrictive covenant agreements in general, and recommended strategies for maximizing protection of your Company while remaining competitive in the field, please contact the MMM Employment Team.
