FTC Publishes Final Rule Banning Non-Compete Agreements
On April 23, the Federal Trade Commission released the text of a final rule banning non-compete agreements – and agreements that “function” as non-competes – under almost all situations. The full text of the final rule can be viewed here (beginning on page 561), and some key points to consider are highlighted below.
1. The rule becomes effective 120 days after it is published in the Federal Register, which will happen shortly. Litigation challenging the rule has already been commenced, and it is possible that a court could enjoin enforcement of the rule until its validity is decided.
2. Except as noted below with respect to senior executives, the rule bans all non-competes past, present, and future.
3. The rule defines a non-compete as: A term or condition of employment [by contract or policy, written or oral] that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
(i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
(ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.
4. The rule protects all workers, irrespective of title, including, but not limited to, employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.
5. The rule requires that on or before the rule’s effective date, employers must give notice to every current or former worker bound by a non-compete banned by the rule, stating that the non-compete is unenforceable and will not be enforced. The rule provides a sample notice. (The rule does not require such notice for non-competes imposed on senior executives prior to the rule’s effective date – because, as discussed below, such non-competes are not banned by the rule.)
6. The text of the rule and the FTC commentary accompanying the rule make clear that the rule bans not only non-competes, but any term or condition of employment that functions as a non-compete. In its commentary the FTC declined to say that confidentiality agreements and restrictive covenants prohibiting solicitation of clients and/or employees are always banned. The answer with respect to any provision is: it depends. If the clause in question is so broad and/or stringent so as to function as a non-compete (i.e., it “prohibits” or “penalizes” or “functions to prevent” a worker from working elsewhere or setting up a business), it would run afoul of the rule. (For instance, a confidentiality agreement imposed by a broker-dealer that prohibits use of any information concerning the financial services industry would be seen as impermissibly functioning as a non-compete.
7. According to the FTC commentary, the rule does not ban garden leave provisions pursuant to which a worker stays on the employer’s payroll for a period of time because such provisions by their terms apply during not after employment.
8. According to the FTC commentary, forfeiture-for-competition provisions – where deferred/unvested compensation is forfeited if the employee goes to work for a competitor – are banned as functioning as a non-compete. (However, provisions that forfeit deferred/unvested comp when an employee’s employment terminates, without regard to whether the employee goes to work elsewhere, would be okay – as would provisions that make payment of a bonus contingent on the employee’s still being employed on the date bonuses are paid.)
9. Seemingly, a good argument could be made that the rule does not ban non-competes contained in separation agreements, because such provisions are not a “term or condition of employment” – to the contrary, they are provisions being imposed after employment ends in return for money to which the employee is not otherwise entitled. However, language in the FTC’s commentary suggests that such provisions are banned – as are provisions making the payment of severance contingent on the employee not competing.
10. The rule does not apply to non-competes imposed before the rule’s effective date on “senior executives,” defined to mean a business entity’s president, chief executive officer or the equivalent, any other officer, with policy-making authority and total annual compensation of at least $151,164. Otherwise, however, on a going-forward basis the rule makes no exception for new non-competes imposed on senior executives and/or highly compensated individuals.
11. The rule does not apply to non-competes imposed in connection with a bona fide sale of a business.
12. The rule expressly preempts any state laws that would allow anything the rule bans, or that detract from the rule’s notice requirement.
13. If the rule is violated, the FTC can bring an administrative proceeding against the offender resulting in a cease and desist order from the FTC. For knowing violations of the rule (or violations of an FTC cease and desist order), the FTC can commence an action in federal court seeking a penalty of $51,744 for “each violation.” For continuing violations, each day equals a separate violation. “In determining the amount of such a civil penalty, the court shall take into account the degree of culpability, any history of prior such conduct, ability to pay, effect on ability to continue to do business, and such other matters as justice may require.”
14. The rule does not apply to most banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons subject to the Packers and Stockyards Act, 1921.
This is not intended to provide legal advice for specific situations, and no legal or business decision should be based on its content. If you would like us to advise you on your specific situation, please feel free to contact us.