CLIENT ALERT: The FTC Has Entered the Game

Don’t Panic

First things first, don’t panic.  The Federal Trade Commission (FTC) voted on April 23, 2024, to enact a new rule that would invalidate non-compete agreements for virtually all employees.  The rule does not become effective for 120 days after it is published in the Federal Register, so no sooner than August 21, 2024.  At least one business has already instituted litigation challenging the rule:  as they evocatively suggested in their lawsuit, the expansive rule-making amounts to an effort “to pull an elephant out of a mousehole.”  Other advocacy groups, including the U.S. Chamber of Commerce, have also expressed an intent to file suit to challenge the rule imminently.  It is highly likely that a receptive federal District Court will enjoin implementation of the rule before the effective date.  Not surprisingly, the FTC dedicated approximately 20 pages of the final rule to its legal authority to engage in regulation anticipating such litigation.  However, in the event that the rule is not enjoined nation-wide, below are some tips for compliance.

Who Is Covered by the FTC’s Rule-Making Authority?

Almost everyone.  The FTC informs us—very helpfully, they might add!—that employers “that are outside the Commission’s jurisdiction under the FTC Act are not subject to the final rule.”  However, the FTC goes on to note that the FTC has jurisdiction over all “persons, partnerships, or corporations.”  There are some minor exceptions, including banks, businesses subject to the Packers and Stockyards Act, and non-profits.  Public employers are also exempted.  Unless you fall into one of those categories, you should prepare for potential compliance.

What Is Prohibited?

The FTC hangs its regulation on its authority to address “unfair methods of competition.”  Relying on that concept, the FTC has defined a non-compete clause to mean any provision that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment for the business imposing the restriction or (2) operating a business in the United States after the conclusion of the employment for the business imposing the restriction.  The FTC defines a “worker” for the purposes of this rule very broadly, to include: employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors.  Workers can be either currently or formerly employed and may be paid or unpaid.  The rule covers both oral and written contracts, as well as policies or other less-formal restrictions.

Subject to limited exceptions addressed below, the FTC rule both prospectively prohibits all non-compete clauses entered into after the rule’s effective date, and invalidates existing non-compete agreements that were entered into prior to the date of the rule’s effective date.  Stated another way, the rule applies both prospectively and retrospectively.  However, existing non-competes with “senior executives” will be allowed to remain in effect.  Senior executives are defined as those making more than $151,164 and who hold a “policy-making position.”  The FTC is envisioning c-suite executives.  For all other workers, though, existing non-competes are no longer enforceable.  The rule also imposes an affirmative obligation on employers to notify affected workers that their existing non-competes are no longer enforceable.

What Is Permitted?

There are very limited exceptions.  First and most importantly, the rule does not apply to causes of action that accrued prior to the effective date—so anyone in active litigation can proceed with enforcement efforts.  The rule also includes an exception for non-competes entered into in the course of a bona fide sale of a business entity.

Finally, it’s important to note what is not a non-compete.  The rule does not impact a business’s efforts to protect its intellectual property, including prohibitions against using or disclosing confidential information and trade secrets, or prohibitions against solicitation of clients or customers about which the employee had proprietary information.  The rule also does not prohibit forfeiture-for-competition provisions like the restriction recently upheld by the Delaware Supreme Court in Cantor Fitzgerald, L.P. v. Ainslie, 2024 WL 315193 (Del. Jan. 29, 2024).

Remedies

Employers should take solace in the fact that the FTC is limited in the remedies it can obtain.  There is no private cause of action under the FTC Act, so workers cannot sue employers directly for violation of these regulations.  Instead, the FTC may institute an action before the Commission, or may file an action seeking an injunction in federal District Court.  The FTC cannot obtain monetary relief for violation of the rule unless a party is first ordered to cease and desist from a violation and fails to do so.

Next Steps

If your business currently uses non-competes in its operations, do not take any preemptive action.  As we note above, it is likely that the rule will be enjoined. 

However, it is worthwhile to assess the agreements you have in place.  Do they actually prohibit employment with a competitor, or are they limited to permissible restrictions such as confidentiality and non-solicitation covenants?  If they do include prohibited provisions, consider whether you really need them.  When clients ask for non-competition agreements, many times what they’re really seeking is to prevent workers from using inside information to better compete—that can still be accomplished without a non-compete.  In addition, multi-state clients may already be using more limited agreements in jurisdictions such as California.  Consider unifying practices across states if you have such a business.

Once that is done, prepare to comply.  Have lawful agreements ready to implement if required.  In addition, identify current and former workers who will have to be notified of the invalidation of their non-competition clauses.  Notice must be in writing and delivered by mail, email, or text.  The regulations contain model language for any employer that wishes to use it.  It is relatively unobjectionable, but you can also modify it to your needs.  But be ready—the deadline to provide notice is the effective date of the rule.

There is a lot yet to learn as businesses prepare for implementation and the FTC prepares to defend the rule in litigation.  Please contact us for additional information if you have any questions about potential compliance.

About Potter Anderson

Potter Anderson & Corroon LLP is one of the largest and most highly regarded Delaware law firms, providing legal services to regional, national, and international clients. With more than 100 attorneys, the firm’s practice is centered on corporate law, corporate litigation, intellectual property, commercial litigation, bankruptcy, labor and employment, and real estate.