On April 23, 2024 the FTC voted - as expected - to affirmatively ban noncompete agreements, with some important modifications from its earlier proposal.
For those of us who are not inclined to wade through the entirety of the 570 pages of commentary accompanying this Rule (which I think it's safe to say is just about everyone), following is a short list culled from the observations from a number of my illustrious colleagues at the cutting edge of this niche area of the law of what you need (or should want) to know - as well as what is coming down the proverbial pike.
What the New "Final" Rule Purports to Ban - and What it Does Not Ban
First, and as an initial matter, it is important to lay out how the Rule defines a noncompete which will be prohibited:
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 . . . where such work would begin after the conclusion of the employment . . . ;
(ii) operating a business in the United States after the conclusion of the employment . . . .
Additionally, there are two (2) absolutely critical things to keep in mind regarding this new Rule:
(1) It goes substantially further than even some of the more employee-friendly state law provisions regarding noncompetes, because unlike those state laws that permit noncompete clauses provided that the departing employee is compensated with "Garden Leave" in exchange for their agreement to forego competing against their former employer during the term of the post-employment restrictive covenant, this new Rule bars such agreements, finding they are prohibited forfeiture for competition clauses, stating that "a payment to a prospective competitor to stay out of the market may also violate the antitrust laws even if it is not a non-compete under this rule.”
(2) Assuming the Rule becomes effective (which, barring a court order enjoining its enforcement it will be this coming September), it will have retroactive effect, meaning that the vast majority of existing noncompete agreements will be deemed unenforceable.
The (Very Limited) Exceptions to the Rule - Including at § 910.3 of the Rule
From what I've gleaned thus far, it appears that the two (2) most important carve-outs to this Rule are as follows:
First, noncompetes entered into in connection with the sale of a business remain viable (which, candidly, makes sense given that in nearly every single case, the value of what was being sold was the business's "good will," and absent the noncompete, it would eliminate the buyer's incentive to go forward with the purchase).
Second, the commentary to the Final Rule expressly notes that nonsolicitation provisions - as distinct from noncompete provisions - can, in limited circumstances, remain enforceable, stating:
“The Commission also notes that, to the extent commenters seeking an exception are referencing different restrictive covenants, including some garden variety nonsolicitation agreements, which do not prohibit or function to prevent a worker from switching jobs or starting a new business as described in Part III.D, the final rule does not apply to them. Thus, the Commission focuses on commenters’ purported need for an exclusion based on non-competes alone.” (Final Rule, p. 80).
That said, the commentary added the following critical caveats with respect to non-solicitation agreements:
"Under the final rule’s definition of non-compete clause, the same inquiry applies to nonsolicitation agreements. 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. The Commission further notes that—like all the restrictive employment agreements described in this Part III.D—non-solicitation agreements, no-hire, and no-business agreements are subject to section 5’s prohibition of unfair methods of competition, irrespective of whether they are covered by the final rule." (Final Rule at p. 81) (Emphasis supplied).
What's Coming Down the Pike - and What You Can Expect
Since the passage of the Final Rule, at least three (3) different lawsuits have been filed challenging, among other things, the FTC's legal authority to issue this Rule in the first instance. Two of those cases are currently pending before the Federal courts in Texas, and one is pending before a Federal court sitting in the Eastern District of Pennsylvania. The primary challenge - and the one garnering the most attention right now - is the lawsuit filed by the U.S. Chamber of Commerce (the country's single-largest business lobby) on April 24 (the day immediately following the passage of the Rule), who also have sought an injunction from the court, barring the implemention of the Final Rule.
In that particular case, the Court has set a fairly tight briefing schedule, with the final papers to be submitted by June 19.
From what I've read, it seems that the vast majority of folks who practice in this particular space do not believe that the Final Rule, as currently constructed, will survive these legal challenges, and the reasons are several, chief among them being:
(a) The FTC has gone way above and beyond its mandate. If such a rule is to be implemented on a national scale - and at the expense of the clear historical precedent of federalism, i.e., individual state's rights, to legislate this area of the law - Congress, not the FTC - must be the one to do so.
(b) The Rule's retroactivity is a huge problem. Without getting into the nitty-gritty (and Constitutional) details of this, simple logic decries the manifest unfairness of undermining countless business' agreements after the fact - especially those agreements that they paid handsomely for, such as with employees' garden leave, as mentioned above.
What Smart Businesses Should Be Doing - Right Now
While this Rule plays out in the courts, it is clear that businesses should proactively consult their local counsel who specializes in this area of the law, and, at the least, to consider paring down their existing restrictive covenants to bans on solicitation of clients that are aligned with protecting the business's legitimate interests.
