Federal Trade Commission’s Noncompete Rule^[1]

Background:

At the end of April, the Federal Trade Commission announced a new rule that seeks to effectively ban noncompete agreements and other restrictive covenants that have the same effect of a noncompete. The final rule was published on May 7, 2024, and is set to take full effect 120 days from its publication date—September 4, 2024. There have already been several lawsuits filed across the country challenging the new rule, and the rule will undoubtedly face further legal challenges in the days and weeks to come. However, unless and until a court issues an injunction staying the rule’s effectiveness pending these legal challenges, the date of full compliance will remain September 4, 2024. Although we believe that such an injunction is nearly certain to occur, we want to make you aware of the new rule’s requirements and discuss how we are navigating this evolving area of the law. 

Requirements Under FTC’s Rule: 

The new rule requires businesses to stop entering into noncompetes with all workers— defined to include paid or unpaid employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors—regardless of the employees’ role, pay, or seniority. The rule will also apply retroactively and prohibits employers from enforcing existing noncompetes with workers, with the limited exception that it will not apply retroactively to senior executives—defined as a worker in a policy-making position for the business and was paid at least $151,164 over the preceding year, or would have been paid that amount when annualized had the worker been employed during the whole year. Under the rule, “policy-making authority” means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.” Further, a policy-making position means:

[A] business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.

The rule also requires that employers provide notice to all workers with existing noncompetes, except senior executives, that their noncompetes will not, and cannot legally, be enforced. The rule includes a proposed form of the required notice to be sent to workers and provides a safe harbor for employers that use that notice. (See FTC Fact Sheet on Noncompete Rule, including link to model language for notice to workers). Under the current rule, such notice of unenforceability must be provided by September 4, 2024.

Exceptions to the FTC’s Noncompete Rule:

This new rule does not apply to:

1. Non-competes executed in connection with a bona fide sale of a business entity. It also doesn’t apply to entities over which the FTC lacks jurisdiction, such as non-profit entities, certain banks and savings and loan institutions, federal credit unions, certain common carriers, certain domestic and foreign air carriers, and businesses subject to the Packers and Stockyards Act of 1921, except as provided by 7 U.S.C. § 227(b).
2. Other types of restrictive covenants, such as non-solicitation agreements, no-hire agreements, non-disclosure agreements, and confidentiality agreements, unless the function of those agreements is to prevent a worker from seeking or accepting work or operating a business in the US following the conclusion of the work engagement to which the agreement applies.
3. Existing noncompete disputes, where an employer has already filed suit over an alleged breach of an existing noncompete prior to the effective date, September 4, 2024. 

Moving Forward:

            We will be tracking various legal challenges to the rule closely over the next one to two months, and recommend that employers do the same. If no court issues an injunction to temporarily suspend the rule—which seems an unlikely scenario at present—then employers will need to prepare to provide employees the required notice of unenforceability and take steps to amend their employment agreements to remove noncompetes for new hires.

            Due to the pending legal challenges, it seems unlikely that this rule will have an immediate impact in the short term, and we do not believe that employers need to take act hastily to begin complying with the rule’s requirements. However, if you would like to begin preparing the required notice of unenforceability or taking steps to remove noncompetes from your employment agreements and/or to more narrowly tailor your employment agreements to focus on the restrictive covenants that are exempted from this rule, we are happy to assist you with those matters.

            Please bear in mind that even if the rule goes into effect, existing employment agreements will not need to be modified for employees who are senior executives—defined as a worker in a policy-making position whose total annual compensation is at least $151,164—and you will not be required to provide notice of the rule to such employees. Additionally, please bear in mind that the rule will not apply to non-solicitation agreements or other restrictive covenants that are narrowly drafted to exclude any terms or conditions of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting new work or operating a business after the conclusion of their employment.

 In the meantime, we will continue to monitor the ongoing legal challenges, and will be in touch in the following weeks regarding any relevant developments that may impact you as an employer. 

            Please feel free to reach out if you have any questions or require our assistance at this time. 

Lisa R. Petersen:  801-415-0121; lpetersen@ck.law

Amy L. Herrington:  801-415-0148; aherrington@ck.law

[1] This Memorandum is provided for informational purposes only. It is not intended as, and does not constitute, legal advice. Further, access to or receipt of this Memorandum by anyone does not create an attorney-client relationship. Although this Memorandum was believed to be correct within the scope of its purposes when written, it may be incorrect or incomplete, was not intended to comprehensively cover any subject, does not cover a number of related matters, and does not cover anyone’s particular situation. As such, it is not reasonable for anyone to rely upon this Memorandum with respect to any particular legal matter.