Blog

On May 7, 2024, the United States Federal Trade Commission (“FTC”) published a regulation in the Federal Register that, subject to some exceptions, effectively prohibits the use of post-employment covenants not to compete in employment-related agreements and policies. Such covenants are commonly referred to as “non-competes.”

The FTC has touted this new regulation as “a comprehensive ban on new non-competes with all workers, including senior executives.” The regulation also requires companies and other persons who have used non-competes with their workers to notify all their workers subject to an existing non-compete that it cannot be enforced after the effective date of the regulation.

The new regulation is supposed to go into effect September 4, 2024 by its terms. However, forthcoming rulings in one of the lawsuits that have been filed which challenge the regulation could stay the regulation from going into effect for the pendency of those lawsuits and possibly even longer. We should have a better idea by the end of May or early June if there will be any such stay.

You may find the full text of the new FTC regulation here. Below is a summary of the regulation’s provisions, some reasons businesses should pay attention to it, and suggestions for complying and coping with the regulation and its likely impacts on businesses.

WHAT ARE THE PROVISIONS OF THE NEW REGULATION?

The new FTC regulation makes it an unfair method of competition for a person (which includes any natural person, partnership, corporation, association, or other legal entity within the FTC’s jurisdiction) to do any of the following after the regulation’s effective date:

• enter into, or attempt to enter into, a “non-compete clause” with any “worker;”
• enforce, or attempt to enforce, a non-compete clause with a worker, or, for a worker who is a “senior executive,” a non-compete clause entered into with the senior executive after the effective date of the regulation; or,
• represent to a worker that the worker is subject to a non-compete clause, or, for a worker who is a senior executive, represent to the senior executive that he is subject to such a clause entered into after the effective date of the regulation.

Additionally, the regulation requires that, for each existing non-compete clause a person enters into with a worker that constitutes an unfair method of competition, the person must send a notice to the worker stating that the non-compete clause will not be, and cannot legally be, enforced against the worker.

The notice must meet certain requirements noted in the regulation. The notice must be sent by September 4, 2024 to all workers that are party to an existing non-compete.

The regulation defines:

• “non-compete clause” as a term or condition of employment that prohibits, penalizes, or prevents a worker from or for either (a) working in the United States with a different person after the employment that includes the term or condition concludes or (b) operating a business in the United States after the conclusion of the employment that includes the term or condition.
• “worker” as any natural person who works or worked for a person, whether paid or not, and regardless of title or status under state or federal law, and includes an “employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”
• “senior executive” as a worker who was in a policy-making position and received total compensation from a person for employment in the preceding year of at least $151,164 on actual basis or on an annualized basis if the worker was employed for only part of the preceding year.

The FTC’s responses to comments about the proposed version of the new regulation indicate that non-disclosure or non-solicitation clauses do not necessarily constitute a non-compete clause.

However, the FTC’s responses also make clear that non-disclosure clauses, non-solicitation clauses, or other restrictive terms in employment-related agreements and policies can constitute an unlawful non-compete clause under the regulation depending on the particular facts, including the particular language used and the impact of the clause or term in question.

By its terms, the new regulation applies only to post-employment non-competes. It does not apply to a non-compete to the extent the non-compete prohibits a worker – while employed with the employer that issued the non-compete – from working for another person or operating a business.

Furthermore, the regulation does not:

• apply to a person or company that is not within the jurisdiction of the FTC;
• make it an unfair practice of competition for a person to enforce, or attempt to enforce, after the effective date of the regulation, a non-compete clause that was entered into with a senior executive before the effective date of the regulation; or,
• apply to a noncompete clause that is 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.”

WHY SHOULD BUSINESSES PAY ATTENTION TO THE NEW REGULATION?

Businesses should pay attention to the new FTC regulation because, among other reasons:

First, a company or other person that violates the regulation can be subject to an enforcement proceeding brought by the FTC and face having to pay a fine of up to $10,000 per violation and an injunction to prevent further violation of the regulation.

The anti-non-compete regulation was adopted, in part, pursuant to Section 5 of the FTC Act. Section 5 makes it unlawful for a person to engage in an unfair method of competition. Section 5 also provides that any person that violates any regulation adopted pursuant thereto can be subject to the foregoing fines and actions.

Second, businesses that currently use or have used non-compete clauses will have to meet the new regulation’s notice requirement. Meeting that notice requirement before the regulation goes into effect will likely impose some significant operational and financial burdens on businesses, especially those with a large workforce or that made extensive use of non-competes.

Businesses will likely have to compile and examine various employment and contractor offer letters, engagement and separation agreements, and employment policies to identity which of their current and former workers are subject to an existing non-compete. In some cases, that examination will not be easy or clean-cut because some restrictive terms – such as confidentiality or non-disclosure provisions – that do not refer to competition on their face can constitute a non-compete under the new regulation.

Business will also have to compile the current or last known email or mailing address for the worker so the notice can be sent to that address.

Third, business that use non-competes will have to review their templates and forms for employee and contractor offer letters and separation agreements to assess whether and to what extent those contain non-competes.

Those templates and forms will have to be edited accordingly to remove the non-compete language. The same action will need to be undertaken with the business’s employment policies.

Again, in some cases, determining whether such a template, form, or policy contains a non-compete that violates the new regulation will not be easy or clean-cut.

The reason being is that some restrictive terms in employment-related agreements, even if those terms do not refer to competition on their face, can constitute a non-compete under the new regulation depending on the particular language and facts pertaining to the term in question.

Fourth, the new regulation will likely have strategic and financial implications for businesses that have used non-competes in the past or had planned to use them in the future. For example:

• Intellectual property. Non-competes provide protection against a worker using a business’s intellectual property with a new employer. By banning non-competes, the new regulation can increase the risk a business faces from a worker sharing its IP with a competitor after the worker’s employment with the business ends.
• Worker training. By banning non-competes, the new regulation increases the risk of workers departing for a competitor after being trained by a business and without the business getting its planned return on the training. That increased risk calls into question the extent to which it makes financial sense for a business to invest in worker training.
• Worker compensation. Typically, a non-compete is either explicitly or implicitly given to a worker in exchange for some increased or additional compensation. The new regulation’s prohibition on non-competes may make it financially imprudent for a business to provide a worker as much compensation as the business has in the past if the business will not receive the benefit of a non-compete from the worker.

WHAT ARE SOME SUGGESTIONS FOR ADDRESSING THE NEW REGULATION?

The following are some suggestions for complying with the new regulation and coping with its potential impacts, in no particular order:

1) Determine whether your business is within the jurisdiction of the FTC. If it is not, then your business should not be subject to the new regulation.

2) If your business intends to enter into a noncompete clause with a senior executive, do so before the regulation goes into effect – but make sure that your company still complies with state law. The law of some states, notably California, prohibits non-competes. The new regulation does not override state laws and regulations that prohibit or restrict the use of non-competes.

3) Review your employment-related policies and form templates and agreements to assess whether they contain provisions constituting non-competes that violate the new regulation. Then determine how best to modify any violating provisions to conform them to the regulation.

4) Establish a systematic plan for meeting the new regulation’s notice requirement. Such a plan should include steps for:

• identifying all employment-related agreements and policies that reasonably might contain an existing non-compete and which current and former workers are subject to those;
• compiling current or last known addresses for all current and former workers subject to an existing non-compete; and,
• preparing and distributing the notice required by the regulation to those workers.

5) Assess the strategic and financial impacts that not being able to use non-competes will have on your business. Among other things, this should include examining:

• whether and to what extent it makes financial sense for the business to continue to invest in developing IP given that non-competes cannot be used as a means to protect that IP;
• whether the business should use or bolster means other non-competes for protecting its IP, such as NDAs or applying for patent protection;
• the extent your business should invest in worker training or, for instance, if it instead makes more sense to invest in recruiting already-trained workers from competitors; and,
• the business’s worker compensation structure given that the new regulation prevents your business from receiving the benefits of a non-compete from its workers.

6) Follow the lawsuits challenging the new FTC regulation and whether the courts in any of those cases have stayed the regulation from going into effect. If a stay is entered, that could postpone the efforts your business will have to take to come into compliance with the regulation.

PARTING WORDS

There are several moving parts to the FTC’s new anti-non-compete regulation. Whether and to what extent your business or its employment-related agreements and policies will be subject to the new regulation is not necessarily an easy question for a layperson to answer. Nor is how to go about complying with the new regulation or meetings its potential implications effectively. Indeed, it is not even clear at this juncture when the new regulation will become effective.

Bevilacqua PLLC is here to help your business understand this new regulation and how your business can address its requirements and impacts successfully. Please contact Joe Wilson with any questions regarding these matters via email at jwilson@bevilacquapllc.com or by calling (202) 869-0888 x. 118.