ALERT: FTC Votes to Ban NonCompete Agreements, Final Rule to Follow
Today, the Federal Trade Commission ("FTC") voted to ban noncompete agreements – a big win for workers across the country. According to FTC's press release, the ban on noncompetes will promote competition and "protect[] the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation." The final rule will become effective 120 days after publication in the Federal Register.
Below is a quick take on FTC's ban on noncompetes.
Quick Take
The FTC's final rule is expansive and bans noncompetes even for senior executives. Notably, while the final rule enables noncompetes entered into with senior executives prior to to the final rule to remain enforceable, once the final rule takes effect, all noncompetes – from low wage workers to senior executives – will be covered by the ban. As the FTC notes, "[e]xisting noncompetes for senior executives - who represent less than 0.75% of workers - can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives."
The final rule includes a prohibition not only on entering into noncompete agreements but also on enforcing or attempting to enforce noncompete clauses and representing that a worker is subject to a noncompete clause. The final rule also includes three exceptions, most notably, a "bona fide sales of business" exception. The business sale exception states that the ban "shall not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets."
While recognizing that noncompetes are an unfair method of competition (i.e., violate Section 5 of the FTC Act), the FTC's press release says that employers still have other alternatives to protect company investments in lieu of noncompetes, including nondisclosure – or NDAs – and trade secret laws.
Takeaway
As the press release states, the ban on noncompetes will not take effect until 120 days after the rule is published in the Federal Register. Companies should therefore plan accordingly. Interestingly, given the gravitational pull of the FTC's noncompete ban, the U.S. Chamber of Commerce has already published a press release stating that the ban sets a "dangerous precedent" and that the Chamber intends on suing the FTC to block the final rule.
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