The Federal Trade Commission (“FTC”) is an independent agency of the United States government who enforces federal consumer protection laws that prevent fraud, deception, and unfair business practices. On January 19, 2023, the FTC proposed the Non-Compete Clause Rule to address conduct that harms fair competition during and after employment. On April 23, 2023, the FTC issued its final rule, ultimately voting to ban the use of non-compete clauses, including “de facto” non-compete clauses, due to their unfair method of competition. This ruling will require employers to notify employees about the new rule and the impact on any existing non-compete agreement (i.e., if the clause is no longer enforceable). The ruling will go into effect on September 4, 2024, unless the legal challenges against the final rule are successful.
What is a Non-Compete Clause?
Under the final rule, a non-compete clause is defined as a term or condition of employment, including a contractual term or workplace policy, whether written or oral, that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition. This rule also includes “de facto” non-compete clauses, such clauses that are drafted so broadly that they effectively would bar an employee from seeking employment with a competitor.
An example may include a clause in an employment contract that states:
[Employee name] agrees not to set up in business as a direct competitor of [company name] within a radius of [number] miles of [company name and location] for a period of [number and measure of time (e.g., “four months” or “10 years”)] following the expiration or termination of this agreement.
In addition, and notably, this final rule does not bar non-solicitation clauses. A non-solicitation clause prevents the employee from soliciting the company’s clients, customers, or ideas for their own gain or the gain of their next employee. Although the barring of “de facto” non-competes may open the door to bar non-solicitation clauses, if the non-solicitation clause is so broad that it prevents or penalizes a worker from seeking or accepting other work from clients or customers, essentially equating to a de facto non-compete clause, there is no specific banning of non-solicitation clauses.
Who Does the Final Rule Include and Exclude?
The final rule specifically prohibits two circumstances for non-compete clauses: (1) new non-compete clauses for all employees and (2) existing non-compete clauses for non-senior executives.
New Non-Compete Clauses for All Employees
Irrespective of a new employees’ employment position, the final rule places a complete ban on any and all non-compete clauses after September 4, 2024. This meaning, regardless of your position, the company may not prevent you from seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment, nor may the company prevent you from operating a business in the United States after the conclusion of the employment.
Existing Non-Compete Clauses for Non-Senior Executives
For workers who are not senior executives, existing non-competes will be considered unenforceable after September 4, 2024. Additionally, employers must provide such workers with notice they are no longer held to the non-compete clause and such clause is obsolete and unenforceable.
On the other hand, the final rule provides exceptions for the prohibition of non-compete clauses, including existing non-competes for senior executives.
Existing Non-Compete Clauses for Senior Executives
For senior executives, including positions such as CEO, CFO, COO, president, executive director, etc., non-compete clauses that were in-effect prior to September 4, 2024, will be considered enforceable. The final rule allows these existing non-competes to remain in force because this subset of workers is less likely to be subject to the kind of “acute, ongoing harms currently being suffered by other workers subject to existing non-competes.” In addition, these remain in full force because of the credible concerns raised about the practical impacts of extinguishing existing non-competes for the executives, including concerns that consideration was exchanged for non-competes, such as the exchange for incentive plans, bonuses, stock awards, options, or severance payments, etc.
Current Litigation
The final rule has been challenged in court, and is likely subject to additional challenges. A case, Ryan, LLC v. Federal Trade Commission, has been filed in the Northern District of Texas. Ryan, LLC, a leading global tax service and software provider, challenged the rule claiming the ban would impose an extraordinary burden on businesses seeking to protect their intellectual property and retain top talent with the professional service industries. Ryan, LLC is claiming the rule would upend companies’ intellectual property protections and talent development and retention by invalidating millions of employment contracts and nullifying the laws of dozens of states. Additionally, Ryan, LLC claims that non-competes are an important tool for firms to protect their IP and foster innovation because without them firms could “steal” a competitor’s employee just to gain insights into their competitor’s intellectual property.
A second case, US Chamber of Commerce v. Federal Trade Commission, has been filed in the Eastern District of Texas. The U.S. Chamber of Commerce and several other business groups brought suit against the FTC stating the final ruling sets a dangerous precedent for government micromanagement and will harm employees, employers, and the economy. Additionally stating that non-compete agreements can be a “useful tool for businesses and employees” as they “protect investments in research and development and promote workforce training.”
Guidance
Although the fate of the final ruling remains at large on the federal level due to the current litigation and challenge attempts, the final rule may be adopted by state legislatures. The proposed final rule may have set the groundwork for states to adopt their own “final rule” and ban non-compete clauses.
In the meantime, and until the final rule goes into effect, employers should be aware of the questions and concerns that may arise, including whether the rule has gone into effect and what that means for the enforceability of their non-compete clause. We suggest Illinois employers that include non-competes in their employment contracts to reach out to their employment law attorneys for assistance regarding complying with this Act, well in advance of the Act’s September 4, 2024, effective date.
At Reno & Zahm, we are proud to represent individuals and businesses in Northern Illinois for over 100 years. Our professionals regularly counsel clients on a large variety of employment matters, including hiring contracts. Contact us today at (815) 987-4050 to schedule a consultation.
This posting is for informational purposes only and is not intended to be legal advice. As the facts and circumstance of each employer are unique, the information provide herein should not be used or relied upon without first consulting a lawyer.