The Federal Trade Commission voted 3-2 to approve a final rule banning noncompete agreements nationwide. Notably, the dissenters argued that the FTC does not have authority to take such sweeping action.
The rule is scheduled to take effect 120 days after it is published in the Federal Register. That timeline, however, may change since the U.S. Chamber of Commerce filed a lawsuit today seeking to strike down the final rule. Other affected parties likely will file similar suits or seek to intervene in the Chamber’s lawsuit and/or file amicus briefs challenging the final rule.
Here are some key take aways from the rule:
- The final rule does not apply where a cause of action relating to a non-compete accrued prior to the effective date.
- The ban applies to employees and independent contractors. However, because the FTC’s authority only extends to for-profit businesses, the rule will not affect non-compete agreements with nonprofit organizations.
- All existing non-competes with employees will be invalid, except for those with “senior executives” (workers earning more than $151,164 annually who are in a “policy-making position”) – estimated by the FTC to be less than 1 percent of workers. Employers are required to inform their employees that their noncompetes are no longer valid.
- After the effective date, new non-competes are prohibited with all workers, including senior executives.
- The definition of “non-compete” does not include prohibitions on competing during employment with the employer.
- Non-solicitation, confidentiality and non-disclosure agreements are not categorically barred. Nevertheless, the factual specifics of each agreement will need to be evaluated to determine if the provision may fall within the FTC’s prohibition.
- Sale of the business scenarios appear to be excluded from the rule.
- The rule permits limited use of non-compete agreements between franchisees and franchisors.
We will continue to monitor these issues as they develop. As always, please contact us concerning these or other matters.