The Federal Trade Commission (“FTC”) has issued a final rule which bans most agreements that restrict an employee’s ability to compete with its employer.  Unless a court intervenes, the rule will become effective September 4, 2024. The new rule is extremely broad. It applies to any agreement or term or condition of employment that penalizes, seeks to or has the effect of preventing an employee from seeking or accepting employment in the United States with a different person or operating a competing business after the termination of the current employment.  This includes contracts and workplace policies, both written and oral. There is an exception for Senior Executives that earn more than $151,164 excluding discretionary bonuses and certain other fringe benefits such as medical insurance, room, board, and contributions to retirement plans.  To come under the exception the “Senior Executive” must have broad, companywide policy making authority.  An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise will not qualify unless his or her authority extends to the entire common enterprise.  

The new rule does not apply to a non-compete agreement entered into by the seller as part of the bona fide sale of a business or an action based upon a breach of a covenant not to compete that occurred prior to September 4, 2024.  The FTC claims that rather than use non-compete agreements, employers are free to use trade secret and non-disclosure agreements.

The new rule requires that by September 4, 2024 the employer notify each worker with whom it has entered into an agreement with a non-compete clause that the non-compete clause with the worker will not and cannot be enforced.  This notice must be in writing and may be delivered by hand, mail, email or by text to a mobile telephone number belonging to the worker.  The rule further provides that the delivery of the required notice creates a safe harbor protecting the employer from a claimed violation.  The FTC has provided sample language for the notice and There is also an exception for an employer that in good faith believes it has the right to enforce a non-compete clause. The rule claims to supersede inconsistent state laws, but specifically preserves any state law that is consistent with the rule.

The FTC is being challenged in court by the U.S. Chamber of Commerce, which is seeking to invalidate the rule. Some of the major arguments include a claim that the FTC lacks the statutory authority to promulgate such a broad rule.  This argument is based upon the idea that the FTC’s authority is limited to challenging specific conduct on a case-by-case basis.  There is also a claim that the FTC violated the major questions doctrine, which requires that agencies cannot pass regulations with vast economic and political significance without clear congressional authorization. In this case, the argument is the FTC by its rule is preempting the laws of approximately 46 states without any specific authority from congress. 

We will have to wait to see if the Courts allow the rule to be enforced. In the meantime, companies that rely upon covenants not to compete with their workers should consider entering into trade secrets and non-disclosure agreements.  

 Keven Danow is an attorney representing members of all three tiers of the Beverage Alcohol Industry and member of The Danow Group, 275 Madison Ave, NY, NY. 10022.  (212 3703744). Website: thedanowgroup.com; email:kd@thedanowgroup.com