The United States Federal Trade Commission (“FTC”) has issued a new Non-Compete Clause Rule (the “Rule”), banning: (1) employers from enforcing existing noncompete agreements against workers, with limited exceptions applicable only to “senior executives”; and (2) employers from imposing new noncompete contracts on workers (including senior executives) after the date the Rule becomes effective. Under the Rule, employers will be required to notify workers bound by existing noncompetes (unless they are a senior executive) that the employer cannot legally enforce any existing noncompete against them. The Rule provides specifications on what must be included in the notice, and even provides a model notice. The Rule applies not only to employees, but also to independent contractors, interns, volunteers, and apprentices.
One key exception to this ban on noncompetes, both existing and new, is that it does not ban the use of a noncompete clause entered into pursuant to a bona fide sale of a business entity, of a person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets, which is a common provision in such transactions.The new Rule marks a significant development in business and employment law, and reflects the FTC’s attempts to balance employers’ and workers’ competing interests. Employers and workers alike should consult experienced legal counsel to evaluate any potential impact on their particular business and employment arrangements. The new Rule is set to become effective 120 days after publication in the Federal Register, which is expected to follow soon, but may be paused due to legal challenges. (The U.S. Chamber of Commerce has already said it would sue the FTC to block the Rule.)
Employers generally view noncompetes as essential tools for protecting intellectual property, trade secrets, and capital investments in their workers. In response, the FTC suggests that non-disclosure agreements and existing trade secret laws allow employers to protect these interests, even without noncompetes. It is important to note that the Rule does not affect the enforceability of, or ability to enter into, non-solicitation and confidentiality agreements with employees. Employers of all sizes should engage a lawyer to evaluate the Rule’s effects on their businesses, and develop new strategies for protecting their proprietary information and investments in their employees.
For employees or independent contractors subject to existing noncompetes, the new Rule will make it easier to seek new employment or start new businesses. Employee advocates have long criticized noncompetes, due to their potential to restrict job mobility and discourage competition. Before leaving their current jobs or launching new businesses, workers subject to existing noncompetes should speak to an attorney first.
While the FTC’s new Rule may advance workers’ interests and promote business competition, its implementation will pose legal questions for both employers and workers. As employers and workers prepare for the Rule’s effects, it remains subject to legal scrutiny, and potential litigation may shape the Rule’s scope and the FTC’s enforcement efforts moving forward.
Attorney Gordon W. Prince is a member of the Business Law Department at Gawthrop Greenwood, PC, where he focuses his practice on business and corporate law, contracts, financing and secured transactions. He was named to Best Lawyers®: Ones to Watch 2024, Super Lawyers Rising Star, as well as Top Lawyers in Main Line Today and the Daily Local News. For more information, contact Gordon at gprince@gawthrop.com or 610-696-8225.
Attorney Jeremy Grivensky is a litigator at Gawthrop Greenwood whose practice includes corporate law. He joined the firm in 2022 after graduating magna cum laude from Temple University Beasley School of Law, where he was a Beasley Scholar and an award-winning editor of the Temple Law Review. Jeremy was named to Best Lawyers®: Ones to Watch in 2024 as well as Top Lawyers by Main Line Today and Daily Local News. For more information, contact Jeremy at jgrivensky@gawthrop.com or 610-696-8225.
