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Understanding the Federal Trade Commission’s Ban on Noncompete Agreements

On April 23, 2024, the Federal Trade Commission (FTC) determined that noncompete clauses are an unfair method of competition, in violation of Section 5 of the FTC Act (“the Act”).  Because of this, the FTC has issued a rule that bans noncompete clauses across the entire country. Section 5(a) of the FTC Act clearly states that “unfair or deceptive acts or practices in or affecting commerce…are…declared unlawful” (15 U.S.C. Sec. 45(a)(1)).

What You Need to Know:

  • The FTC’s new rule bans employers from entering into or maintaining noncompete clauses;
  • The rule is set to take effect on September 4, 2024, 120 days after publication in the Federal Register;
  • Once the rule becomes final, employers are required to rescind all noncompete clauses and provide notice to workers previously subject to such clauses;
  • Noncompete agreements involving senior executives are exempt from the rule; and
  • At the moment, employers should identify existing noncompete agreements and consider pursuing alternative policies to protect company privacy rights.

What is the FTC’s Ban on Noncompete Agreements?

The FTC’s new rule regarding noncompete agreements makes it illegal to (a) enter into or attempt to enter into a noncompete with a worker; (b) maintain a noncompete with a worker; or (c) represent to a worker, under certain circumstances, that the worker is subject to a noncompete. As such, while the rule is not applicable to other types of employment restrictions, such as non-disclosure agreements, it does govern existing noncompete agreements. Under the rule, employers are required to rescind all noncompete agreements and actively inform workers that the provisions are no longer in effect.

The Rationale Behind the Ban

The basis behind the FTC’s ban is based upon its finding that noncompete agreements often serve as an exploitative practice that prevents workers from moving freely to pursue better working conditions and higher wages. Additionally, the promotion of new business formation has been cited as a driving objective behind the ban.

The Only Exception

There is one significant exception to this broad prohibition, however. Noncompetes for senior executives, that were entered into prior to the rule’s effective date, may remain in force.

To qualify as a senior executive, the individual must (1) be in a policy-making position and (2) earn more than $151,164 annually.

What’s Next?

It is important to note that lawsuits have already been brought by business groups in Texas challenging the ban, in which they point to the FTC’s lack of legal authority. They allege the rule violates the federal law governing agency rulemaking because the FTC failed to consider narrower limitations on noncompetes and the FTC does not have authority to issue retroactive rules. Further, it is alleged that enactment of the rule would constitute an unconstitutional delegation of legislative authority to the executive branch, in violation of Article 1 of the Constitution.

As the final rule faces legal challenges, in the meantime, employers should focus upon identifying existing non-competes and providing notice of the rule to those previously subject to such provisions. Companies may also wish to revise internal policies to remove noncompete clauses from employment agreements and to implement different protections for private information.

Fortunately, Arnett Law Group, LLC is well equipped to assist employers in navigating this new rule and its impact on future employment contractual agreements. Arnett Law Group provides a range of services to cater to help your business navigate this new legal terrain, ensuring your company and its contracts remain compliant and well-prepared for any changes ahead. Contact our office at (312) 561-5660 for more information or review our website at www.arnettlawgroup.com.

 

May 24, 2024.

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Arnett Law Group, LLC, was founded by Daniel J. Arnett, a trial lawyer with more than 25 years of experience.

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