Podcast - The FTC Issued a New Rule to Ban All New Non-Compete Agreements

Good day and welcome to another podcast of Clearly Conspicuous. As we've noted in previous sessions, our goal in these podcasts is to make you succeed in this current environment that's very aggressive and progressive, make you aware of what's going on with the federal and state consumer protection agencies and give you practical tips for success. It's a privilege to be with you today.

The FTC's New Rule Banning New Non-Compete Agreements in all Employment Contexts

Today, we discuss the Federal Trade Commission issuance of a new rule on April 23, banning new non-compete agreements in all employment contexts. The highly anticipated rule, which was first proposed in draft form in January of 2023, is expected to have significant impacts on employers in a wide swath of industries who have traditionally relied on non-competes to protect company secrets and intellectual property, as well as to encourage investment in worker training. It will face certain challenges in courts, and whether it ultimately is enforced by the court remains to be seen.

Background on the New Rule

Here's some background. The rule comes on the heels of a 2021 executive order from the Biden Administration encouraging agencies to enact a "whole government" approach to encouraging competition. Following the order, the FTC announced its intention to reinvigorate Section 5 of the FTC Act, which authorizes the agency to prevent businesses from using unfair methods of competition. In a statement in support of the rule, Chair Lina Khan said that "the freedom to change jobs is core to economic liberty and to a competitive, thriving economy" and that "non-competes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC's proposed rule would promote greater dynamism, innovation and healthy competition." Employers and others have strongly opposed the rule, asserting that the FTC does not have the legal authority to regulate competition in this way and that the rule "opens up a Pandora's box, where this commission or future commission could be literally micromanaging every aspect of the economy."

What the New Rule Does and How Employers Can Comply with It

As passed by the FTC commissioners on a 3-to-2 vote among partisan lines, the rule applies to anyone, whether paid or unpaid, and to independent contractors. Specifically, the new rule prohibits employers from entering into a new non-compete with any employee, including senior executives, which is a change from the proposed rule, or representing to any employee that the employee is subject to a non-compete. Employers may continue to enforce existing non-competes with senior executives. However, 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. The proposed rule does not apply to non-competition 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 the business operating assets.

Concluding Thoughts

So here's the key takeaway. Employers covered by the rule should expect to face added complexity to the already multifaceted challenge of hiring and retaining talent. Moving forward, employers may be able to look to employment agreements used in states such as California, where non-competes were already unenforceable, for guidance on restructuring their employment agreements to comply with the new rule. The new rule would become effective 120 days after the FTC publishes it in the Federal Register. Covered employers have until the effective date to come into compliance with the rule. Yet, the U.S. Chamber of Commerce has vowed to challenge the rule in court, perhaps as early as April 24, and thus whether the rule ultimately is enforceable is yet to be determined. So please stay tuned to further programs as we identify and address these key issues and developments. I wish you continued success and meaningful day. Thank you.