BAKER JENNER CLIENT ALERT! WHAT YOU NEED TO KNOW – FTC ISSUES FINAL RULE ON NON-COMPETES, SUBSTANTIALLY ALTERING THE RELATIONSHIPS ON WHICH BUSINESSES DEPEND

The below is merely informational and does not communicate, whether intentionally or otherwise, any legal, compliance or other advice.

In our February 2023 Client Alert, we advised that the Federal Trade Commission (“FTC”) had issued its proposed rule prohibiting non-competes nationally, an early policy initiative of the Biden Administration. Over a year later, on April 23, 2024, the FTC issued its 570-page Final Rule, prohibiting all non-competes generally, except in a few narrow exceptions. 

For practical purposes, what does the new Final Rule mean for business owners? 10 things you need to know:

  • Why did the FTC adopt the Final Rule? As mentioned in our prior blogs and alerts, the growing trend nationally, albeit a relatively early one, has been to restrict the scope and applicability of non-competes. Many reasons have been cited for this trend over the last decade. In broad strokes the FTC’s Final Rule recites many of them, including unfairness and potential harm to markets and trades, although given the Final Rule’s far reach, it is perhaps a little surprising that it relies so heavily on anecdotes and unverified studies for its fundamental justification.
  • Has the Final Rule been challenged in Court? Several actions were filed within days of the Final Rule’s publication. The Final Rule is potentially vulnerable on several grounds, although only time will tell whether these efforts will be successful, and if so, to what extent. Presently, no court has issued an injunction against it.
  • Who is subject to the Final Rule? The Final Rule applies to all employers and workers. An “employer” is defined as any person who hires or contracts with a worker. And “worker” is defined as any natural person who is an employee, independent contractor, extern, intern, volunteer, apprentice or sole proprietor who provides a service. The definitions and their application make little effort to distinguish between the class or types of workers, including based on their control, ability to engage in decision-making and implement strategy, or access to sensitive internal information. 
  • Who is not subject to the Final Rule? The Final Rule excludes the direct franchisor-franchisee relationship from the definition of “worker.” Further excluded from the Final Rule are senior executives, although only to the extent already subject to an existing and enforceable non-compete and who otherwise meet the Final Rule’s requirements. And the Final Rule excludes non-competes entered into as part of a good faith sale of a business.
  • What does the Final Rule preclude Employers from doing? Under the Final Rule, non-competes are generally classed as “an unfair method of competition.” Accordingly, it prohibits employers from entering into, enforcing, or representing a worker as being subject to a non-compete, or attempting any of the same. The Final Rule is broad in what it considers a non-compete, which covers any arrangement, however accomplished, that has the effect of prohibiting or preventing a worker from, or that penalizes a worker for, seeking or accepting work from a competitor or starting or operating a competing business. Under this definition, forfeitures of equity or incentive income are included within the prohibition, as are severance provisions tied to non-competition. 
  • What doesn’t the Final Rule preclude? Non-solicits, confidentiality, and a smattering of other arrangements, like “garden leave” provisions, may survive scrutiny, although they should be carefully prepared to avoid the imposition of restrictions that in sum, are too similar in function and scope to a non-compete.
  • What other obligations are imposed? By its effective date, the Final Rule mandates that employers inform all affected workers that their non-competes are void and of no force or effect, by conspicuous written notice, for which the FTC has provided an approved form as part of its rulemaking. 
  • What can my business do? The good news is that a business has multiple alternatives to the traditional non-compete that can be implemented to protect its valuable confidential information, trade secrets, and relationships. This more nuanced and layered approach often provides better targeted protections than may be achievable with a non-compete, and should be carefully considered as part of a standard employment or engagement package.
  • When does the Final Rule become effective? The Final Rule is effective 120 days after its publication in the Federal Register.
  • What’s next? Court challenges take time, frequently years, to wind their way through to the U.S. Supreme Court, where presumably litigation over the Final Rule will land. In the meantime, employers should expect a good deal of litigation over which solutions do and do not violate the Final Rule, and how. Experienced counsel will therefore be an important step in navigating towards solutions more likely to withstand judicial scrutiny.

The FTC’s Final Rule introduces significant challenges for businesses, affecting as it does a broad swath of relationships on which businesses rely. There is, however, still time to review existing employment, independent contractor and other arrangements to determine optimal approaches, solutions and alternatives. Baker Jenner has built its reputation on making your success our business™. Contact us to schedule a consultation and discover how we can support you. 

 

The following two tabs change content below.

Baker Jenner LLLP

Baker Jenner LLLP is a business solutions law firm. We partner with clients to achieve their goals while managing transactional, regulatory, and legal risks.

Latest posts by Baker Jenner LLLP (see all)