Previously we reported on a proposed rule by the Federal Trade Commission (the “FTC”) that would eliminate some non-competes nationwide. On April 25, by a 3-2 vote (three Democrats voting yes, two Republicans voting no), the FTC issued a final rule that, with some exceptions, bans the use of non-competes in employment agreements nationwide. Under this Rule (found here), certain non-compete clauses will no longer be enforceable after this law is codified. This comes as a result of the FTC’s conclusion that non-compete clauses are “unfair methods of competition” that ultimately restrict the progression of the economy and the employment growth rate. The Rule is still subject to Court challenges which are being filed.

Here are some questions we think will be frequently asked regarding this new Rule and the challenges with enforcing their non-compete clauses.

Who will this apply to? The ban will apply to all workers, who the FTC defines as “an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a person.” This means lawyers, doctors, salesmen, surgeons, dentists, sandwich-makers and all companies and corporations, big or small.

What does this mean if you currently have a non-compete provision in your employees’ contracts? The FTC says that if you have currently have them in your agreements, they are no longer enforceable, and you will need to advise your employees of this change. The rule states that notice is a requirement, and it lists specific details that need to be included in your notice. It may not affect other provisions in the agreements, but you should consult with an attorney to be sure.

Are there exceptions to the ban? As with many rules, there are numerous permitted exceptions. Some of the more important ones are:

-         Existing Lawsuits. First, if you have a non-compete clause that is currently before a court of law, you may continue litigating your case as an “existing cause of action.”

-         High-level employees. You may also enforce your non-compete if you have an employment agreement with an employee that is considered a “senior executive,” i.e., a worker who is in a policy-making position and received at least $151,164 in annual compensation either (i) in the preceding year; or (ii) when annualized if the worker was employed during only part of the preceding year; or (iii) when annualized if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause. However, you are unable to include a non-compete clause in future agreements with senior executives.

-         Selling a business. You can also enforce a non-compete in “a bona fide sale of a business entity, a person’s ownership interest in a business entity or of all or substantially all of a business entity’s operating assets.”

When will this Rule be in effect? The new Rule will not be in effect for another 120 days, on or about August 21, 2024. However, the FTC has some steep obstacles to face before the law can be implemented. One of them is a potential lawsuit from the U.S. Chamber of Commerce who argues that the FTC does not have the power to implement such a restriction on businesses. Coupled with the employers and business owners who argue that non-competes are necessary to protect their business interests, there is a chance the Rule will either be delayed or not be enforceable.

Despite whether the FTC’s Rule will be enforceable, certain states already have or have proposed their own measures to limit the effects of non-compete clauses or to make them unenforceable entirely. Maryland, for example, has passed HB 1388, which would bar certain non-compete clauses for the healthcare and veterinary industry so long as they “provide direct patient care” and earn less than $350,000 per year.  For individuals providing the care and making more than $350,000 per year, non-competes are limited to one year and 10 miles. Although not yet signed by Governor Wes Moore, it could be a significant disruption in the healthcare industry.

If you have questions regarding your non-compete, or you would like to implement other alternatives, such as confidentiality agreements, non-disclosure agreements or non-solicit agreements, please contact the attorneys at RKW, LLC to help guide you through this process.

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