Federal Non-Compete Ban – Legal Update

Rule is Currently Blocked Nationwide

The Federal Trade Commission (FTC) adopted a new rule that was set to render most non-compete clauses with employees and contractors unenforceable starting September 4, 2024. However, on August 20, 2024, a federal court held the FTC’s non-compete rule was unlawful and blocked its enforcement nationwide. What does that mean for the federal non-compete ban? Let’s examine.

What Comes Next?

The FTC may appeal this decision, which set aside the FTC’s nationwide non-compete ban and also held that the FTC lacked rulemaking authority with respect to unfair competition.

Next Steps for Employers?

As a result of this decision, employers can hold off with any preparations to comply with the FTC non-compete ban and should continue to monitor the appellate process. However, if the FTC is successful in overturning this recent federal case, we recommend employers be aware of the scope of the proposed nationwide ban for planning purposes.

Background on the proposed FTC Rule

Subject to a few exceptions, the proposed FTC rule would have made it illegal to enter, enforce, or represent that a worker is subject to a non-compete clause, even if it was agreed to before the proposed FTC rule goes into effect.

“Workers” for purposes of the FTC rule include employees, as well as independent contractors, interns, externs, volunteers, apprentices, former “workers” and others. Worker does not include another business (i.e., an agent or franchisee).

The proposed FTC rule – Impacts on Non-Solicitation, Non-Disclosure Agreements and Expense Reimbursement Provisions

Under the proposed FTC rule, non-solicitation provisions, non-disclosure agreements and other provisions such as moving, signing bonus and training repayment provisions are not expressly banned, but they would be prohibited if they function to prevent a worker from seeking or accepting work or from operating a business.

A non-solicitation clause is another provision closely relating to a non-compete clause and typically prevents a former worker from attempting to influence or recruit a business’s employees, independent contractors, and customers. Non-disclosure agreements can also have anti-competitive effects and could be deemed a form of non-compete if they have the effect of restricting competition. Certain expense repayment provisions such as reimbursement for relocation expenses and employee education and training expenses paid to an employee if an employee leaves or is terminated could be banned under the FTC’s proposed broader interpretation of agreements that functionally restrict competition.

Employers should avoid broadly worded non-solicitation and non-disclosure agreements and instead attempt to tailor them in a fashion to protect legitimate employer interests (such as trade secrets) and be certain they also comply with applicable state law. A safer alternative to paying a new employee a lump sum for moving expenses or a signing bonus upon hire and seeking reimbursement if they terminate in the face of tightening regulations is to pay bonuses to cover employee training and moving expenses and signing bonuses in increments over time, but only if the employee continues to be employed. The employer loses a chance for reimbursement from the departed employee, but an employer can still use these benefits as a method to encourage longevity in its hires.

Exceptions to the proposed FTC rule

Existing Lawsuits: Businesses could still pursue any lawsuit enforcing a non-compete agreement brought before the FTC ban takes effect.

Sales of Businesses: The proposed FTC rule does not apply to a non-compete entered in a bona fide sale of a business, the seller’s ownership interest in a business, or substantially all of a business’s operating assets.

Non-Competes with Senior Executives: Non-compete clauses entered by senior executives before the FTC rule’s effective date would be exempt from the FTC ban. Senior executives are workers in a policy-making position, such as an executive/officer role, with compensation of at least $151,164 per year. The proposed exemption does not permit new non-compete agreements with senior executives after the proposed FTC rule takes effect.

State Law Requirements

The proposed FTC rule would preempt conflicting state laws concerning noncompete and non-solicitation clauses. Colorado companies may continue to enter into non-solicitation agreements limiting the ability to solicit its customers but only with workers who make more than $74,250 annually (in 2024) and if (a) the non-solicitation clause is no broader than required to protect trade secrets and (b) the Colorado worker notice requirements are met. Broadly drafted non-solicitation agreements could be invalid under the proposed FTC ban as de facto non-compete agreements and/or Colorado regulations. Colorado rules also require a specified form of notice be provided to the worker of non-solicitation restrictions.

Notice Requirement

If the FTC Ban goes into effect, companies will be required to notify workers and former workers with non-compete clauses that the clauses are no longer enforceable. The notice must identify the person (likely the business) who entered the non-compete clause with the worker and must be delivered via hand, mail, email or text. The proposed FTC rule provides model language businesses may use to ensure they comply with the rule.

Since the rule is enjoined by current legal challenges, we do not recommend sending notices at this time. Monitor the progress of legal challenges and be prepared to provide proper notice should the FTC ban go into effect in the future. We will continue to follow any new developments.

Bottom Line – Wait and Plan

Due to the uncertainty in this area, businesses may consider initiating legal actions relating to non-competes with workers now or entering non-competes with executives prior to the date a nationwide FTC ban goes into effect, if at all. In Colorado, non-solicitation of customer provisions will continue to be enforceable with highly compensated workers, with proper notice, if drafted in a way to reasonably protect trade secrets.

To prepare for the possibility of an FTC ban, we recommend companies gather information concerning non-compete clauses in their contracts, policies and employee manuals to identify any impacted current and former workers who could be impacted.

We also recommend business owners continually review and assess their standard contract clauses, policies and employee handbooks for any non-compete provisions or broadly worded non-solicitation and non-disclosure clauses that could be revised to comply with the proposed FTC rule and Colorado regulations meanwhile still protecting the company’s trade secrets.

Have questions about the new rule or how it applies to your business? Contact us today for a free consultation.