On April 23, 2024, the Federal Trade Commission (FTC) voted to publish the “Non-Compete Clause Rule” to ban employers from entering into non-compete clauses with workers on or after the effective date. The rule will be effective 120 days after publication in the Federal Register. However, legal challenges are expected.
The FTC issued the rule under authority of sections 5 and 6(g) of the Federal Trade Commission Act (FTC Act):
- Section 5 of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting commerce”.
- Section 6(g) of the FTC Act authorizes the Commission “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”
First proposed in January 2023, the rule was finalized after consideration of more than 26,000 public comments.
An Overview of The FTC’s Non-Compete Ban
Here’s what you need to know about the FTC’s final rule to ban non-compete agreements:
- The final rule bans new non-competes with all workers, including senior executives, after the effective date.
- Existing non-competes can remain in force for senior executives. The final rule defines the term “senior executive” to refer to workers earning more than $151,164 annually and who are in a “policy-making position.”
- Existing non-competes for workers other than senior executives are not enforceable after the effective date of the final rule. Further, employers must provide notice to workers that these agreements are no longer enforceable.
- The FTC rule supersedes state laws that conflict with the final rule.
- There are no recordkeeping or reporting requirements, other than notifying workers, excluding senior executives, that existing non-compete agreements are no longer enforceable.
How Does the FTC Define “Non-Compete”?
The final rule defines “non-compete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- 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
- Operating a business in the United States after the conclusion of the employment that includes the term or condition.”
Are There Exceptions to the FTC’s Non-Compete Ban?
The ban applies to all persons who work or who previously worked, “whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”
There are some exceptions to the FTC ban of non-competes:
- The final rule does not include a franchisee in the context of a franchisee-franchisor relationship. It does, however, include employees of the franchisee or franchisor.
- Some employers are outside the FTC’s jurisdiction and therefore not subject to the rule, including banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits.
- The final rule does not apply to non-compete agreements between a buyer and a seller of a business entity.
This last exception may allow non-compete agreements to remain a critical protection for businesses with partners and shareholders. If a non-compete agreement is limited strictly to ownership of a competing business or its assets, then it could still be enforceable. A former partner or shareholder under the restrictions of a non-compete provision could still work for a competitor but could not own or be a partner in the competitor or its assets.
For many, this could be an effective deterrent from seeking opportunities with a competitor and give the former company a way to protect its trade secrets.
When Will the FTC Ban on Non-Competes Be Effective?
Before the FTC can enforce the rule, it must publish the final version in the Federal Register, which contains all government agencies' rules and regulations. The final rule was published on May 7, 2024, and will go into effect 120 days later, on September 4, 2024.
That said, legal challenges have already been filed.
Business Groups to the FTC: We Will See You in Court
Within hours of the FTC vote, global tax services firm Ryan filed a lawsuit in the Northern District of Texas, seeking to “prevent the immense, undue burdens the FTC’s rule would impose on service-driven companies of every size nationwide.”
One day later, the U.S. Chamber of Commerce filed a complaint against the FTC in federal court, requesting an injunction to stop the agency from enforcing the non-compete rule. The U.S. Chamber called the ban “not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.”
If the courts grant an injunction while the validity of the ban is determined, it could be many months before the rule becomes effective.
Read "FTC Non-Compete Ban Timeline" for the decisions and events leading up to the final rule and the legal challenges since.
If the FTC rule is struck down, legal oversight of non-compete agreements would revert to state law. In Texas, non-compete agreements are enforceable if they meet certain requirements.
What Does The FTC Ban Mean for Employees Working in Texas?
“For our employee clients, we’re still advising them that we need to operate under the assumption that the non-compete will be enforceable,” says Raymond Panneton, shareholder and business attorney at Hendershot Cowart.
“We certainly don’t want to advise someone, 'Oh yeah, don’t worry about the noncompete. The FTC is going to do away with them' and the rule doesn’t get upheld.”
Have you been asked to sign a non-compete?
Ask a business attorney to review the agreement before signing. No employer has the right to contractually prohibit an individual’s business indefinitely; non-competes must be reasonable in their restrictions to be enforceable. Senior executives may also have many special considerations that require negotiation and modifications.
How Does the FTC Ban Affect Texas Businesses?
For now, employers can keep using non-compete agreements in Texas, but should speak to their attorney and prepare to adjust their practices if the legal challenges are resolved and the final rule becomes official.
Should it become effective, this new rule will change how non-competes are drafted and how those that have already been written are enforced.
Alternatives to Non-Competes in Texas
Non-disclosure agreements, non-solicitation agreements, confidentiality agreements, as well as business policies and practices that protect proprietary information can be effective alternatives to non-compete agreements.
The Texas Uniform Trade Secrets Act protects confidential information that gives one company a competitive advantage over another. The information must have actual or potential economic value derived from its secrecy, and the owner must have taken reasonable measures to protect the secrecy of the information. There is also federal trade-secret protection for interstate or foreign commerce under the Defend Trade Secrets Act of 2016.
Our Texas trade secrets attorneys can review your business agreements and policies to ensure you have the best protections in place.
Our Non-Compete Attorneys Are Here to Help Protect Your Confidential Information and Trade Secrets
The attorneys at Hendershot Cowart P.C. will be watching closely as this issue develops.
If you are ready to take additional steps to protect your confidential information and trade secrets now, contact our law firm today. We have been protecting the interests of Texas businesses since 1987.
