On April 23, 2024, the Federal Trade Commission (FTC) passed a new rule banning all new noncompete clauses with all levels of employees. The rule as passed will allow only existing noncompete agreements with certain senior executives to survive. The rule defines such senior executives as individuals in a policy-making position earning a minimum of $151,164 per year. All other existing noncompete agreements will be unenforceable as of the effective date. The new rule is to become effective 120 days after publication in the Federal Register.
Employers with current non-competes in place for employees, other than those in senior executive roles, must provide notice to those employees stating that the employer will not seek the enforcement of non-competes that are currently in place. The FTC has provided model notices in English and six other languages for employers’ use, which are available here.
This new rule raises real concerns for many employers as it will invalidate existing contractual provisions for which consideration was paid. Many employers have used noncomplete provisions to protect legitimate business and economic interests. Currently, noncompete provisions are interpreted by court under state law based on individual contract language and circumstances, and most are found to be enforceable. Those that are invalidated are done under a review of each particular contract and situation, not by a blanket prohibition of all such provisions.
The FTC has taken the position that eliminating noncompete provisions will enhance competition and create new small businesses, but the projections do not address the many existing businesses that will be harmed by having their contracts invalidated and by the potentially unfair competition that will surely occur if existing contracts are invalidated.
The U.S. Chamber of Commerce immediately challenged the rule in a lawsuit filed in the Eastern District of Texas federal court – the same U.S. District Court that recently enjoined and struck down the new NLRB joint employer rule. The U.S. Chamber of Commerce argues that the noncompete rule must be struck down because (1) the FTC “lacks the authority to issue regulations proscribing ‘unfair methods of competition’” (2) that even if such authority existed, the rule is unlawful “because noncompete agreements are not categorically unlawful” and is a question for Congress, not for an agency, (3) the new rule is impermissibly retroactive, and (4) the new rule “reflects an arbitrary and capricious exercise of the Commission’s powers.” More lawsuits challenging the rule are anticipated, and if the rule goes into effect, the vagueness of certain parts of the rule will certainly cause litigation as to their meaning and application.
We expect that as the lawsuit progresses, the Court will issue a preliminary injunction staying the effective date of the law until the lawsuit is resolved. Hurwitz Fine P.C. is monitoring this issue. Remember that the new rule has not yet gone into effect, so existing noncompete provisions are as yet unscathed. Note that there are other contract provisions that can be strengthened to protect your trade secrets, confidential information, and non-solicitation concerns. Our Labor & Employment attorneys can help you analyze your needs and draft new or updated contracts.
