Labor & Employment Alert: Are Non-Compete Clauses Illegal Under Federal Law? Not Yet, But Stay Tuned …

On April 23, 2024, the Federal Trade Commission (“FTC”) passed a final rule that generally prohibits “non-compete clauses” in employment contracts with “workers” (e.g., employees, independent contractors, interns, volunteers, etc.). If the final rule takes effect, it would make non-compete clauses unlawful and unenforceable across the United States as an “unfair method of competition,” regardless of whether applicable state law would otherwise allow them. The rule will not take effect until 120 days after it is published in the Federal Register (for which there is no hard deadline but generally occurs within weeks of the approval of a final rule). However, it is expected that opponents of the rule will bring swift legal challenges that could affect whether the rule ever takes effect at all.

What is the FTC?

The FTC has existed for over one hundred years. The law that created the FTC was enacted in 1914. Under that law, the FTC generally “is . . . empowered and directed . . . to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(2). To accomplish this, the FTC can investigate complaints, issue cease-and-desist letters, seek injunctions in federal court, and—as here—promulgate rules rendering certain business activities unlawful.

Scope of FTC’s Jurisdiction and Authority

Although the scope of the FTC’s jurisdiction and authority will certainly be in dispute here, it is generally empowered to regulate all but a handful of specific industries engaged in interstate commerce (e.g., banks, common carriers, and the livestock, meat, and poultry industries). “Unfair methods of competition” and “unfair or deceptive acts or practices” are not defined. However, courts previously “developed a broader concept of the authority conferred by Congress upon the Federal Trade Commission,” such that “acts not in themselves illegal or criminal, or even immoral, may, when repeated and continued and their impact upon commerce is fully revealed, constitute an unfair method of competition within the scope of the Commission’s authority to regulate and forbid.” Hastings Mfg. Co. v. Fed. Trade Comm’n, 153 F.2d 253, 257 (6th Cir. 1946).

Summary of the Final Rule

Employers will not have to formally rescind any existing non-compete agreements with their workers. Existing non-competes will only become unenforceable. Employers will, however, have to provide written notice to their workers by the effective date of the rule (that is, within 120 days after the final rule is published in the Federal Register) that the non-competes will not and cannot be enforced after the effective date of the rule. The final rule provides model language for employers to use that will satisfy the notice requirement, and it also lists a variety of methods by which the notice can be adequately transmitted.

Importantly, the final rule requires notice to former workers who are subject to non-compete clauses, as well as current workers. Although it is not clear, it would stand to reason that notice should be given to former workers only when those former workers are subject to non-compete clauses that have not expired by the date the final rule become effective. The FTC suggests that employers should have contact information for their former workers for at least the past four years because that is a standard look-back period for other state and federal law purposes such as tax purposes. However, employers are not required to give notice to any workers for whom they do not have contact information.

Modest Exceptions

The final rule has a handful of exceptions, including in the context of a bona fide sale of a business, and if an effort to enforce a non-compete clause is done with a good faith belief that the regulation does not apply. These exceptions are rather squishy; but two other exceptions are more straight-forward:

• If the final rule becomes effective, pre-existing non-competes with “senior executives” will remain lawful and enforceable. (Senior executives are defined as workers who are in a policy-making position and receive at least $151,164 in compensation.)

• Any pre-existing non-competes for which a claim for breach of contract has “accrued” before the effective date of the final rule will remain lawful and enforceable under applicable state law. Therefore, any litigation to vindicate such a claim (either litigation pending at the time the final rule takes effect, or subsequent litigation on a claim that already accrued and is not otherwise barred by the applicable statute of limitations) should remain unaffected.

What Protections Would Employers Have Left?

Confidentiality agreements, non-disclosure agreements (“NDAs”), and non-solicitation agreements would remain lawful and enforceable in general. The FTC has expressed the opinion that these are better methods for employers to protect their legitimate business interests, along with trade secret and patent laws. However, the FTC defines a “non-compete clause” broadly, so if one of these other types of agreements were overly broad or burdensome on a worker, the FTC reserves the right to construe it as a de facto non-compete clause and deem it unlawful and unenforceable.

What Do We Do Now?

While this new FTC rule would render most current non-compete clauses unenforceable across the country and prohibit non-compete clauses in the future, employers need not undertake immediate action consistent with the rule. The rule is not yet in effect. Non-competes are not currently unlawful or unenforceable under the FTC’s rules. State laws on non-competes continue to apply. Moreover, as of the publication of this advisory, at least two lawsuits have been filed to challenge the rule; and with this being a presidential election year, the outcome of the election could have a significant impact on whether the rule is modified, delayed, or completely rescinded. Where the only time-sensitive obligation is to give workers notice, there presently should be sufficient time for employers to allow the legal and political challenges to play out before engaging in that administrative process. The attorneys at Brouse McDowell, however, will continue to closely monitor this matter and will be here to let you know what steps employers may need to take in the future.