United States - Employee Benefits & Compensation (2024)

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3 May 2024

KR Kane Russell Coleman Logan

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On April 23, 2024, following on its proposal from last year, the Federal Trade Commission ("FTC") issued a Final Rule implementing a comprehensive...

United States Employment and HR

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On April 23, 2024, following on its proposal from last year, theFederal Trade Commission ("FTC") issued a Final Rule implementing a comprehensive ban onnon-compete agreements with workers finding that non-competes arean unfair method of competition under the Unfair or Deceptive Actsor Practices Section of the FTC Act.

Given the scope of the FTC's Rule, there are substantialconcerns that the FTC has exceeded its legal authority, butcompanies would be well advised to take stock of their agreementswith employees that contain non-competition clauses as well asother restrictions that may be implicated by the Rule (such asnon-disclosure or non-solicitation provisions).

What agreements are covered by the Rule?

The FTC's Rule applies to any agreement with a workercontaining a non-compete clause.The Final Rule defines a"non-compete clause" as a "term or condition ofemployment that prohibits a worker from, penalizes a worker for, orfunctions to prevent a worker from:"

  1. seeking or accepting work in the United States with a differentperson where such work would begin after the conclusion of theemployment that includes the term or condition; or
  2. operating a business in the United States after the conclusionof the employment that includes the term or condition.

"Employment" is defined as "work for aperson." A "person" means any natural person,partnership, corporation, association, or other legal entity withinthe FTC's jurisdiction, including any person acting under coloror authority of state law. This broad language includes a workerwho provides services as an "employee, independent contractor,extern, intern, volunteer, apprentice, or sole proprietor andfurther includes a person who works for a franchisee orfranchisor." However, the definition of "worker"does not include a franchisee in the context of afranchisee-franchisor relationship.

Does the Rule apply to other agreements with employees,such as non-disclosure, non-solicitation, or retention bonusagreements?

Possibly. The FTC's responses in the Final Rule to publiccomments on the original proposal shed light on how it willinterpret the Rule's coverage. Where a non-disclosure orconfidentiality agreement is narrowly tailored to confidentialinformation of the business, the Rule will likely not affect thoseagreements. Conversely, where an agreement restricts the use ofinformation (i) derived from the worker's general training,knowledge, or experience gained on the job or otherwise or (ii)that is readily ascertainable by other companies or the generalpublic, it may amount to a non-compete under the Rule.

The FTC also did not expressly exclude non-solicitationprovisions from the Rule, stating that whether a non-solicitationclause qualifies as a non-compete under the Rule is fact specific.Courts have historically considered non-solicitation provisionsthat are drafted broadly, meaning the provisions are not limited tocontacts with whom the employee worked, as overbroad restraints ontrade. It is conceivable that broadly-worded non-solicitationclauses may fall under the Rule's definition.

As to retention bonus or incentive agreements, the FTC didexplain that merely requiring repayment or forfeiture of a bonus ifan employee leaves a job will not be treated as a"non-compete" under the Rule. Any provision requiringforfeiture for competition would likely be covered by the Rule,however.

When does the Rule go into effect?

The final Rule is effective 120 days after the date of thepublication in the federal register. At this time, the Rule has notbeen published. However, the Rule could be published within the next few days.

What does the Rule mean for existing non-competeagreements?

If the Final Rule goes into effect, non-compete agreements forall workers except "senior executives" cannot be enforcedagainst the worker. This means that a worker cannot be required toenter into a non-compete agreement after the effective date, and ifa worker previously agreed to a non-compete clause prior to theRule's effective date, the company is unable to enforce theagreement. In effect, after the effective date, an employer willhave no recourse against an employee for breach of a non-competeprovision previously entered into.

The company who entered into an existing non-compete agreementwith the worker is also required to provide clear and conspicuouswritten notice to the worker for each existing non-compete clausethat such a clause will not be, and cannot legally be, enforcedagainst the worker.

What is the exception for "SeniorExecutives?"

Under the Rule, a "senior executive" is a worker whois in a policy-making position with an annual or total compensationof at least $151,164. Policy-making positions include presidents,chief executive officers, and workers who have "finalpolicy-making authority over significant aspects of a businessentity."

Under the Final Rule, only new non-compete agreements enteredinto with senior executives after the Rule's effective date areinvalid, meaning that any pre-existing non-compete agreements withsenior executives are unaffected. A person may not enforce orattempt to enforce a non-compete clause with a senior executiveentered into after the effective date or represent that such anagreement is enforceable.

Are there any exceptions to the Rule?

The Final Rule does not apply to bona fide sales of businesses,including a non-compete clause entered into by a person pursuant toa bona fide sale of a business entity, of the person'sownership interest in a business entity, or of all or substantiallyall of a business entity's operating assets.

The Rule also does not apply to existing causes of action thataccrued prior to the effective date nor in instances where a personhas a good-faith basis to believe that the Rule is inapplicable.The FTC explained that this good-faith exception was included outof an abundance of caution to ensure that the Rule does not runafoul of any First Amendment protections, but the FTC does notbelieve that the Rule infringes on any First Amendment protections.This indicates that the good-faith exception will likely be narrowin its application.

The Final Rule also does not annul or exempt any person fromcomplying with any State statute, regulation, order, orinterpretation applicable to a non-compete clause pertaining toState antitrust, consumer protection, and common laws, indicatingthat some protections still exist for businesses and employers. TheRule only supersedes such laws to the extent that a law allows aperson to engage in unfair competition as defined under theRule.

Additionally, as noted above, the definition of"worker" does not include a franchisee in the context ofa franchisee-franchisor relationship. Such businesses may continueuse of non-competes because the Rule is inapplicable tofranchisee-franchisor relationships.

Will the Final Rule stand?

The Chamber of Commerce has already filed a coalitionlawsuit1 in the Eastern District of Texas against theFTC, claiming the Rule exceeds the FTC's legal authority,constitutes an unlawful interpretation of the law, constitutes anunconstitutional delegation of authority, and causes unlawfulretroactivity. A Dallas-based global tax services firm has alsofiled a suit in federal court challenging the FinalRule.2

Given the sweeping breadth of the Final Rule, it is unclear thatthe Rule will withstand legal challenge. Regardless, the Ruledemonstrates a growing hostility toward non-competes. As mentionedin KRCL's previous commentary, some states have alreadyrestricted non-compete provisions. Businesses should keep awatchful eye on such trends. Additionally, even if the Rule isinvalidated, the proposal may foreshadow additional enforcementefforts by the FTC and other federal agencies to limit the use oreffect of non-compete agreements, as Michael Twomey discussed withThe Texas Lawbook last year.

What should companies do now toprepare if the Rule survives?

Now is a good time for companies to take stock of their employeeagreements and their terms. An inventory of your company'sagreements and those that the Final Rule may implicate will giveyou a head start should the Rule go into effect and requirerevisions to agreements.

In the event that the Rule survives the legal challenges, otheravenues exist to protect a business's investment in itsemployees and goodwill. For instance, as noted above, narrowlytailored non-solicitation agreements and non-disclosure agreementsshould escape coverage under the Rule.

Footnotes

1. U.S. Chamber of Commerce v. Fed. TradeComm'n, No. 6:24-cv-00148-JCB, pending in U.S. DistrictCourt for the Eastern District of Texas, TylerDivision.

2. Ryan LLC v. Federal Trade Comm'n, No.3:24-cv-00986-E, pending in U.S. District Court for the NorthernDistrict of Texas, Dallas Division.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

United States - Employee Benefits & Compensation (2024)

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