FTC Bans Most Noncompetes - But Don't Get Too Excited

The long-awaited rule from the Federal Trade Commission regarding noncompetes was released yesterday, and it's a doozy. The FTC "has determined that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes."

You can safely assume there will be lots of litigation over this new rule. And I wouldn't hold my breath that the Supreme Court in its current makeup will uphold it. Meanwhile, until a court says otherwise, the rule is in place. What does it mean?

Effective date: The rule isn't effective until 120 days after publication in the Federal Register, so presumably that will be from yesterday. That means the rule will be in effect on August 21, 2024.

Existing noncompetes: Most of them are now deemed illegal and unenforceable, except those involving "senior executives," defined as those earning more than $151,164 who are in a “policy-making position”. But most noncompetes are illegal anyhow, with or without the rule, in my opinion. There are many defenses to noncompetes that exist even if this rule is tossed, and that can help people who are waiting for the effective date.

Future noncompetes: Most will be illegal except those for business purchases.

Noncompete clause defined: "Non-compete clause means: (1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:  (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.  (2) For the purposes of this part 910, term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral." 

Nonsolicitation agreements: These are provisions saying you can't solicit employees or clients of the company for 1 - 2 years or so. They aren't specifically banned. However, many will be banned in my opinion. The FTC says this:

Non-solicitation agreements are generally not non-compete clauses under the final rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business. However, non-solicitation agreements can satisfy the definition of non-compete clause in § 910.1 where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends. Whether a non-solicitation agreement—or a no-hire agreement or a no-business agreement, both of which were referenced by commenters, as discussed previously—meets this threshold is a fact-specific inquiry. 

Weasel words:  “It is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a noncompete clause where a person has a good-faith basis to believe that this part 910 is inapplicable.” Not particularly helpful to give a weaselly way out. But the Court or FTC would have to determine that there was a good faith basis to believe that it fell within an exception or that the rule had been stayed by a court.

Notice required: Employers will have to send notices to everyone they have noncompetes with to advise them that the noncompete clause won't be enforced. It has to be hand-delivered or emailed/mailed. 

Existing causes of action: If you're sued for a noncompete or breached one before the effective date, the new rule doesn't apply. However, the FTC did a very nice brief on why these things shouldn't be enforced, and you should be able to use some of their analysis to argue issues like lack of a legitimate interest other than preventing competition, lack of good faith, and some other defenses.

How will this play out? I think the rule will be stayed by a red-friendly court and will be litigated. So it's unlikely it will actually go into effect this year, if at all. 

But let's say employers send out those notices and then the rule is stayed or reversed? What will happen then? Can they say never mind? Or is the noncompete void? Will employers who send the notices have to get new ones signed? I would think that they would be difficult to enforce after the notice goes out. 

One thing is for sure - employment lawyers will be plenty busy for awhile after this.

Noncompete law is very state-specific until this rule goes into effect, so if you have a noncompete agreement, talk to an employee-side employment lawyer in your state if you want to understand your rights and responsibilities.