What Should Employers Know about the FTC’s Final Rule Banning Non-Competes?

If you do not have time to read all 570 pages of the Federal Trade Commission’s (FTC) final rule and explanation banning non-competes (and who does other than an employment attorney?), here are the essentials.

What does the final rule do?

At a high level, the final rule bans new non-competes, bans the enforcement of now-prohibited non-competes and bans efforts to represent to any workers that they are subject to a non-compete prohibited under the new rule. While employers may continue to enforce non-competes against senior executives (who must meet both an income and duties test as set forth in the new rule), employers may not enter new non-competes even with senior executives after the rule’s effective date.

In addition to these prohibitions, employers must affirmatively notify employees (other than senior executives) that their non-competes are no longer enforceable. The FTC provides model language in the final rule, although employers are also allowed to use their own language.

Importantly, the ban on non-competes and enforcement does not apply to actions accruing prior to the rule’s effective date.

When does it take effect?

The new rule becomes effective 120 days after publication in the Federal Register, but employers must provide the notice described above to employees no later than the effective date.

To whom does the final rule apply?

The ban applies to employers within the FTC’s jurisdiction, meaning that nonprofits and other organizations exempted under the FTC Act are excluded. Workers protected under the rule are defined broadly to include both current and former employees and independent contractors.

What are the biggest differences between the proposed and final rules?

One of the most significant differences is the FTC’s change to the proposed parameters of the “sale of a business” exception to the ban. Whereas the rule proposed over a year ago required that at least a 25% interest be sold for a non-compete to be allowed, now only a “bona fide” sale is required. The rule does not define “bona fide” but requires that the non-compete be entered “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

The FTC also modified the details of the notice that employers are required to provide to workers regarding the ban. Rather than requiring formal rescission of agreements, employers need only notify individuals before the rule’s effective date that their non-competes are no longer enforceable. Notably, though, this timeline is accelerated from the 180 days after the effective date that employers had under the proposed rule to comply with this requirement.

Why is the FTC banning non-competes?

The FTC spends dozens of pages explaining why it believes non-competes are an unfair method of competition that it believes should be banned, including that they are over used, repress wages and reduce worker mobility. To achieve its goals, the FTC believes it necessary to prohibit enforcement of even current non-competes.

After considering over 26,000 comments (25,000 of which the FTC claims supported a total ban), the FTC declined to make more significant changes from the proposed rule because it believes employers have sufficient alternatives exist to protect their legitimate business interests.

Where do we go, or what can we expect, from here?

At the time of this legal update, one suit has already been filed in Texas federal court and the U.S. Chamber of Commerce has announced plans to file a suit seeking an injunction against the final rule, focusing on what it believes is a lack of authority by the FTC to enact this kind of substantive rule. The two FTC commissioners who voted against the final rule on the agency’s live webcast announcing it explained their rationale that echoes the Chamber’s arguments and that will likely appeal to certain judges, depending on where any challenge is filed, and Justices of the U.S. Supreme Court who have recently decried nationwide injunctions.

Even if the entire rule is not struck down, it contains severability language that would allow the rest of the rule to take effect. For instance, if the requirement that employers notify employees that their current non-competes are void is invalidated, the ban on future non-competes could still be upheld.

As the results of any legal challenges work themselves out, current parties to non-compete litigation should be prepared to answer questions about the new rule even though actions accruing prior to the effective date are excluded. In addition, employers should anticipate that their employees may hear about this rule and ask questions about if their non-compete is still effective. Employers should be prepared to respond in some fashion even as they evaluate their best course of action and the potential for legal challenges to the rule.

If you have questions regarding this topic, please contact Fredrikson’s Employment, Labor & Benefits Group.