On April 24 the Federal Trade Commission (FTC) passed a groundbreaking new rule that bans employers from imposing non-compete agreements on their workers. This new regulation, which is scheduled to become effective 120 days after being published in the Federal Register, has the potential to significantly impact businesses across the United States, forcing them to reconsider their strategies for retaining talent and protecting corporate secrets. The rule is not yet effective and it may not reach that point. Let’s take an overview of the new rules, discuss how they might affect existing non-compete agreements, and explore alternative measures businesses can take to adapt to this change.

Overview of the New FTC Rule

The FTC defines a non-compete clause as a contractual term that “has the effect of prohibiting the worker from seeking or accepting employment” , or operating, a business deemed to be “competition” after the conclusion of the worker's employment with the employer. Worker is defined to include employees, independent contractors and others. On its face, the new rule does not prevent a non-compete covenant while still employed.

Under this new FTC rule, employers are prohibited from entering into or attempting to enter into non-compete clauses with most workers. The ban is retroactive and applies to nearly all employees, from low-wage earners to mid-level managers, as well as independent contractors. Employers cannot force them to sign post-term non-compete agreements or restrict their ability to seek employment with competitors.

Excluded from the new rule are senior executives who, prior to the effective date of the new rule, (1) were in a policy-making position and (2) receive or received total annual compensation of at least $151,164 in the preceding year. The FTC recognized the need for some level of protection for highly sensitive information possessed by senior executives where non-competes were part of their obligation prior to the new rule, those legacy non-competes must be narrowly tailored in geographic scope and duration.

This new rule pre-empts state laws that would otherwise permit non-compete clauses.

Impact on Existing Non-Compete Agreements

If the new rule goes into effect, the ban requires employers to actively inform their workers that these clauses are no longer in effect. Certain information needs to be use in that notice. Any existing non-compete agreement with a worker who is not considered a senior executive is unenforceable, and businesses cannot legally prevent these employees from leaving for a competitor, even if they signed a non-compete in the past. With respect to senior executives under legacy non-compete agreements, those agreements will need to meet any other applicable rules, such as state rules (where applicable) that require such restrictions to be narrowly drafted in time and scope.

The FTC's asserted justification for this sweeping change is that non-compete agreements hinder competition, suppress wages, and limit workers' ability to pursue better job opportunities. The nullification of existing non-compete agreements could lead to a significant shift in the workforce, as workers who were previously bound by these agreements would be free to seek employment with competitors or start their own businesses in the same industry.

Exceptions to the New Rule

Excepted from this new rule are (i) non-compete clauses entered into in a “bona fide” sale of a business entity or the person’s ownership interest or a sale of all or substantially all of a business entity’s assets, (ii) any situation where a worker is in breach prior to the effective date, or (iii) where a business has a good faith belief that the new rule does not apply. These exceptions are not tightly drafted so how far they go will take time to determine.

Adapting to the New Rules: Strategies for Businesses

The FTC's ban on non-compete agreements represents a major shift in the business landscape. Businesses should have their non-compete agreements with senior executives reviewed by legal counsel to see if they appear to they comply with the FTC's narrow exception.

Businesses that have relied heavily on non-compete agreements to protect their interests will need to quickly adapt to the new landscape and find alternative ways to safeguard their trade secrets, client relationships, and other valuable assets.

While the ban on non-compete agreements may present challenges for businesses, there are several strategies that can be employed to retain talent and protect corporate secrets:

The FTC's rule is likely to face several legal challenges that could delay or stop its going into effect. One suit has already been filed by the U.S. Chamber of Commerce. It is possible Congress and state legislatures will also become active with their own rules. Thus, it is essential for businesses to stay informed and develop effective strategies for the future. By proactively addressing the challenges posed by the ban on non-compete agreements, companies can position themselves for success in an evolving business environment.

For additional information please contact Michael Radin, Esq. of Tarlow Breed Hart & Rodgers, P.C. at (617) 218-2000 or at mradin@tbhr-law.com.