Am I Free From My Noncompete? Not So Fast!

Pending Issues with the FTC’s decision to ban noncompetes

On April 23, 2024, approximately 15 months after it first issued a proposed rule barring employee noncompetition agreements, the Federal Trade Commission (“FTC”) voted 3 to 2 to adopt the rule, concluding that entering into noncompetes is an unfair method of competition. Anyone affected should review the final rule before making any business or legal decision concerning noncompetes. Although there are economic considerations for and against the final rule, businesses using noncompetes in their employment relationships will need to reconsider their existing practices to come into compliance while finding new, legal ways to protect trade secrets and confidential information. But the saga of noncompetes in American business is not over. The following issues remain:

• The rule will become effective 120 days after publication in the Federal Register, which will likely happen in the next few days. Necessary compliance measures should be implemented before the effective date.
• Exceptions included in the final rule include the following:
  • Existing noncompetition agreements with senior executives will remain in force, but employers are prohibited from entering into or attempting to enforce any new noncompetes with such employees. A senior executive is defined as a worker who is earning more than $151,164 and is in a “policy-making position.”
  • The rule does not apply to non-competes entered into by a pursuant to a bona fide sale of a business entity.
  • The rule does not apply where a cause of action related to a noncompete accrued prior to the effective date of the rule (120 days after the rule is published in the Federal Register).
  • The rule states that it is not an unfair method of competition for a person to take any action with respect to a noncompete where that person has a good faith basis to believe that the final rule is inapplicable

• Employers are required to notify employees other than senior executives who are bound by existing noncompetes that they will not be enforcing any noncompetes against them. The final rule includes model language that satisfies this notice requirement.

• Through its definition of “worker,” this rule is applicable to employees of a franchisor or franchisee, but the rule does not apply to a franchisee in the context of a franchisee-franchisor relationship.
• Organizations such as the U.S. Chamber of Commerce intend to challenge the FTC’s authority to issue the final rule. Employers should exercise caution and seek legal advice before relying on any litigation brought to forestall implementation.
• Other restrictive covenants such as confidentiality/nondisclosure agreements or nonsolicitation agreements may still be allowed if they are not written so broadly as to bring those agreements within the definition of a noncompete under the final rule. The final rule defines a noncompete clause as “a term or condition of employment 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 that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” For purposes of the final rule, “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
• Until the final rule takes effect, Virginia employers should be careful to comply with Virginia Code Section 40.1-28.7:8, which prohibits noncompetes with “low-wage employees.” Currently, “low-wage employees” are defined as those workers who make less than $73,320 annually. Once the final rule takes effect, noncompetes will be prohibited even if they otherwise comply with the Virginia statute.

If your business uses noncompetition agreements as part of your employment practices, you should monitor developments and prepare to come into compliance with the assistance of legal counsel.