On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule on noncompete agreements. The final rule, which goes into effect within 120 days (August 2024), is intended to promote competition and increase wages by banning noncompete agreements nationwide.<\/p>\n\n\n\n
Although the majority of states have at least partial bans on noncompete agreements and clauses, the FTC had not made any formal ruling on these agreements until now. This rule makes all existing noncompete agreements, with a few exceptions, void and unenforceable.<\/p>\n\n\n\n
FTC Position on Noncompete Agreements<\/strong><\/p>\n\n\n\n The FTC\u2019s position on noncompete agreements is that they tend to suppress wages, stifle innovation, and prevent the formation of startup businesses. Noncompete agreements as currently practiced prevent employees from leaving their current job to seek new employment or start their own companies,<\/p>\n\n\n\n Although legally noncompete agreements are supposed to be time- or geographically limited, in practice they serve to keep workers in positions they would prefer to leave or require them to bear unnecessary costs such as relocation, downgrading, or legal action. The FTC estimates that approximately 30 million workers are subject to some type of noncompete clause.<\/p>\n\n\n\n Final Rule Summary<\/strong><\/p>\n\n\n\n Under the new (\u201cfinal\u201d) rule, existing noncompete agreements and clauses will no longer be enforceable once the rule goes into effect. There is a carve-out for existing noncompetes for senior executives and highly-compensated individuals.<\/p>\n\n\n\n The FTC ruling states that as currently used, noncompete agreements are a method of competition, not \u201ca condition of the marketplace,\u201d and as such they are inherently unfair to workers with lower bargaining powers. This has been the attitude of many state governments who have refused to enforce noncompete agreements.<\/p>\n\n\n\n What the Final Rule Means to Employers<\/strong><\/p>\n\n\n\n For businesses with existing noncompete agreements, the FTC\u2019s final rule raises some important questions and concerns. The FTC\u2019s press release<\/a> addresses some of these questions, but the FTC has not issued any final guidance on this matter.<\/p>\n\n\n\n Trade Secret Laws and Nondisclosure Agreements<\/strong><\/p>\n\n\n\n Businesses with concerns over intellectual property theft and other loss of business product should review other alternatives to blanket protections afforded by noncompete agreements.<\/p>\n\n\n\n \u201cInevitable Disclosure\u201d and the Final Rule<\/strong><\/p>\n\n\n\n Some companies challenging the final rule have raised the possibility of using the so-called \u201cinevitable disclosure\u201d doctrine to challenge the rule. This doctrine is heavily disfavored in most states and has a very high bar of proof in states which do accept it.<\/p>\n\n\n\n \u201cInevitable disclosure\u201d states that courts may prevent an employee from working for a competitor in certain positions because they must \u201cinevitably disclose\u201d their former employer\u2019s trade secrets to do so. This concept of a de facto noncompete agreement requires proof of \u201cthreatened misappropriation\u201d and not merely proof that the employee knows the confidential information.<\/p>\n\n\n\n The Defend Trade Secrets Act (DTSA) does not expressly prohibit or accept the \u201cinevitable disclosure\u201d doctrine, and the FTC\u2019s final rule makes no specific statement on this doctrine. It may require further litigation to see whether a presumptive noncompete agreement will withstand the FTC\u2019s final rule.<\/p>\n\n\n\n Litigation and Additional Considerations<\/strong><\/p>\n\n\n\n As soon as the new rule was announced, the U.S. Chamber of Commerce announced it would be bringing suit against the FTC for an \u201cunlawful power grab.\u201d It is not clear whether the FTC has the ability to pass this type of legislation through regulatory action, or if it must be legislated through Congress. A lawsuit was filed in the Northern District of Texas challenging the Constitutionality of the rule.<\/p>\n\n\n\n As of this writing (April 2024) no stay of the FTC\u2019s rule has been issued. Unless or until an injunction is issued, companies should proceed as if the rule was in effect.<\/p>\n\n\n\n It appears that non-profit companies will not be affected by the FTC ruling. Section 5 of the FTC Act, the basis for the final rule, does not apply to non-profit companies. Industry analysts warn that the FTC may be looking for \u201cfor-profit\u201d companies hiding under \u201cnon-profit\u201d protections.<\/p>\n\n\n\n Existing State Laws on Noncompete Agreements<\/strong><\/p>\n\n\n\n In March 2024, just before the FTC released its own final rule, Washington State\u2019s governor signed Substitute Senate Bill 5935, which updates and clarifies Washington\u2019s existing law limiting the use of restrictive covenants in employment agreements. The existing law went into effect in 2020.<\/p>\n\n\n\n It is important to note that the FTC rule is not retroactive. \u201cIn addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date.\u201d Any action affected by the clarifications to the 2020 law will not be changed by the FTC rule. They will need to be litigated, and SB5935 may aid in the case.<\/p>\n\n\n\n The rule preempts state laws that conflict with the final rule. The rule does not prohibit noncompete agreements or clauses, but it does make them unenforceable, essentially rendering them moot. For instance, if your noncompete agreement forbids a worker from working for a competitor within 15 miles, and a former employee goes to work for a competitor 10 miles away, under the FTC\u2019s rule, you may not take any action against the employee under your noncompete agreement. Under Washington\u2019s law you can, but your employee can report you to the FTC for violating the rule.<\/p>\n\n\n\n Employer Next Steps<\/strong><\/p>\n\n\n\n Because the rule is so new, no legal action has yet reached the courts for injunctive relief, let alone a decision. Businesses should not assume it\u2019s \u201cbusiness as usual\u201d and hope that the courts will rule against the FTC across the board. Employers should review their existing noncompete agreements and determine if all these agreements are necessary, or if some are simply there for convenience. If you can release some employees from unneeded noncompete agreements, you\u2019ll be in a better position no matter how the FTC cases turn out.<\/p>\n\n\n\n Audit your trade secret and IP protections and ensure that everything is secure. Noncompete agreements only go so far in protecting your data. Keeping employees safely in your orbit will not help you if your system is open to hackers and data thieves.<\/p>\n\n\n\n Consider rewriting your noncompete clauses. The FTC\u2019s rule does not address nonsolicitation and nondisclosure agreements. As noncompete agreements fall out of favor in more states, NDAs and nonsolicit agreements have filled the gaps. A well-crafted NDA is as enforceable as a noncompete, does not limit or restrict employees\u2019 rights, and gives your trade secrets the same protection.<\/p>\n\n\n\n Conclusion<\/strong><\/p>\n\n\n\n Finally, go to the FTC website and bookmark the \u201cFinal Rule\u201d page. Check it regularly for updates as the effective date nears. If there are no injunctions against the rule, the FTC may publish additional guidance on compliance. If the rule is stayed, the FTC will put the information on their website.<\/p>\n\n\n\n Stay current on the information and let your legal department and your employees know what is happening. Communication is always key.<\/p>\n\n\n\n FTC Model Language for Notice of Nonenforcement of Noncompete Clause<\/strong><\/p>\n\n\n\n A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of<\/em> [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of<\/em> [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:<\/p>\n\n\n\n The FTC\u2019s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit <\/em>ftc.gov\/noncompetes<\/em><\/a>. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at <\/em>ftc.gov\/noncompetes<\/em><\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule on noncompete agreements. The final rule, which goes into effect within 120 days (August 2024), is intended to promote competition and increase wages by banning noncompete agreements nationwide. Although the majority of states have at least partial bans on noncompete agreements and […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"off","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[1],"tags":[],"class_list":["post-1034","post","type-post","status-publish","format-standard","hentry","category-intellectual-property"],"_links":{"self":[{"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/posts\/1034"}],"collection":[{"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/comments?post=1034"}],"version-history":[{"count":0,"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/posts\/1034\/revisions"}],"wp:attachment":[{"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/media?parent=1034"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/categories?post=1034"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/tbillicklaw.com\/wp-json\/wp\/v2\/tags?post=1034"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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