FTC issues rule to ban non-competes; U.S. Chamber threatens lawsuit; What do employers need to know?

This article discusses the details of the rule and provides measures employers can take to protect their proprietary information and other business interests.

The Federal Trade Commission (FTC) issued the Non-Compete Clause Rule on Tuesday, calling for a comprehensive ban on non-compete agreements nationwide. The FTC concluded that non-competes are an “unfair method of competition and therefore a violation of Section 5 of the Federal Trade Commission Act.”

Although the FTC has issued the rule, it is not effective until 120 days after publication in the Federal Register. Threats of legal challenge have already surfaced. Just hours after the 3-2 vote by the FTC to issue the final rule, the U.S. Chamber of Commerce announced it would sue the FTC to block the rule from going into effect.

After discussing the details of the rule, this article also provides measures employers can take to protect their proprietary information and other business interests.

What is the FTC Non-Compete Clause Rule?

Under the rule, existing non-compete agreements for the vast majority of workers will no longer be enforceable. Existing non-compete agreements for senior executives – defined as workers earning more than $151,164 annually and who are in “policy-making positions” – will remain in effect under the rule. Employers are banned from entering into or attempting to enforce any new non-competes, even those involving senior executives. For all other employees, existing non-compete agreements will become unenforceable. Moreover, the rule requires employers to notify those employees that their non-compete agreement will not be enforced against them.

The FTC rule focuses on employment restrictions. The rule excludes from its scope non-compete clauses entered pursuant to “a bona fide sale of a business,” which extends to the sale of a person’s ownership interest in an entity or substantially all of a business entity’s operating assets.

The FTC originally proposed the Non-Compete Clause Rule on January 19, 2023. After receiving 26,000 public comments, the FTC finalized the rule with the following reasoning:

“The final rule provides that it is an unfair method of competition — and therefore a violation of section 5 — for employers to, inter alia, enter into non-compete clauses with workers on or after the final rule’s effective date. The Commission thus adopts a comprehensive ban on new non-competes with all workers.”

The FTC estimates that 18% of U.S. workers, or 30 million people, are covered by non-compete agreements. In the official FTC press release published Tuesday, the Commission claims that the rule will lead to an estimated increase from 17,000 to 29,000 more patents each year for the next 10 years, growing new business formation by 2.7% per year, or 8,500 additional businesses.

“Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

However, U.S. Chamber of Commerce President and CEO Suzanne P. Clark disagrees.

“The FTC’s decision to ban employer non-compete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” said Clark. “Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Non-compete agreements are either upheld or dismissed under well-established state laws governing their use. … The chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”

Alternative ways to protect your business interests

In light of the rule, employers should consider taking other measures to protect their business interests. Below are some of the ways employers may do so:

• Bolster confidentiality agreements to better protect the company’s interests. Consider coupling well-drafted confidentiality requirements and restrictions with strong remedies for violations, like injunctive relief, liquidated damages, compliance requirements (including inspection rights to ensure compliance), and forum selection clauses providing for favorable locations and courts.
• Utilize other available restrictive covenants, such as agreements that prohibit employees from soliciting customers or other employees.
• Strengthen company policies to strictly prohibit unfair competition activities, such as taking, sharing, or using the employer’s confidential information for reasons not authorized by the employer.
• Provide enhanced training targeted toward preventing and identifying unfair competition activities.
• Develop a system that monitors and audits employee activities to prevent and identify unauthorized access or other unfair competition activities.
• Utilize the protections provided by trade secrets laws. Federal law, and many states’ laws, prohibit the misappropriation and misuse of trade secrets. To take advantage of these laws, employers must take steps now to ensure that their information will qualify as trade secrets under applicable law. 

The full scope of an employer’s options will depend upon the laws of the various states in which the employer conducts business.

Conclusion

News concerning the rule is still fresh, and there will certainly be mixed reactions to it and the show of authority by the FTC. It did not take long for the U.S. Chamber to respond, and other business association advocacy groups will likely follow suit.

Adams and Reese LLP will continue to monitor developments concerning the rule, including the anticipated legal challenges, and any court decisions that may follow. Please do not hesitate to contact them should you have any questions concerning the rule or how it may impact your business.