FTC’s National Ban of Non-Compete Agreements May Take Effect Soon

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Does your business have non-compete agreements with its employees? The Federal Trade Commission (FTC) may make it more difficult to protect your business from employees leaving for competitors and actively contesting your business.

The FTC approved a trade regulation rule banning employers from using non-compete contracts to prevent most workers from joining a competitor. Unless enjoined by one of at least three lawsuits pending against it, the new FTC rule will become effective on September 4, 2024. Many states, including California and other western states, have long-standing public policies against enforcing non-compete agreements that will continue in effect if they are stronger than the FTC’s rule.  But this is the first time in over 50 years that FTC officials have sought to regulate the issue on a national basis.

The new rule prohibits companies from enforcing existing non-compete agreements on anyone other than senior executives, classifying non-competes as “unfair methods of competition.” It also bans employers from imposing new non-compete agreements on any employees, including senior executives, going forward. (Banks, credit unions, and nonprofit healthcare employers are exempt from this ban.) Non-compete clauses are not affected by this Rule if entered into in connection with the bona fide sale of a business.

The practice of including non-compete clauses in employment agreements has grown significantly in recent years. (The FTC found that approximately one in five workers are subject to non-compete agreements.) They have been utilized to protect a business’s valuable intellectual property and trade secrets from disclosure to a competitor through its former employees who might be hired by the competitor. However, many states and labor organizations have accused employers of overuse and sought to outlaw the non-competes as unfair business methods that curtail competition or as an unreasonable restraint of trade.

One of the most prominent lawsuits attacking the new rule was filed in April 2024 by the U.S. Chamber of Commerce in the U.S. District Court for the Northern District of Texas. The Chamber alleges in its complaint that the FTC does not have the authority to regulate non-compete clauses, stating, “The sheer economic and political significance of a nationwide non-compete ban demonstrates that this is a question for Congress to decide, rather than an agency.”

Conkle, Kremer & Engel attorneys believe that appropriately drafted and enforceable non-compete provision may protect businesses and their property interests. If your business is considering including a non-compete clause in its employment or termination agreements, you will need to consider the potential impact of this Trade Regulation Rule on your plans. Conkle firm attorneys are familiar with this area of the law can help your business maximize the protection of its information and intellectual property, respond to cease and desist letters from competitors or, if necessary, engage in litigation of issues of misappropriation of trade secrets.