On April 23, 2024, the Federal Trade Commission (FTC) issued its final rule banning non-compete provisions nationwide (the Rule). While the FTC contends that non-competes keep wages low, suppress new ideas and stifle the rights of workers to pursue new jobs, legitimate business interests are also entitled to protection. There are other forms of protections for these business interests that are not affected by the FTC’s Rule. While the Rule will not go in effect until September 4, 2024, and may be stayed while litigation over the Rule winds its way through the court system, now is the time to consider the impact of the Rule on your agreements and business interests. Whether you are an advisor considering a move, a firm engaged in recruitment, or a firm looking at the effect on proprietary information and business interests, now is the time to plan for what comes next.

Summary

While the Rule bans almost all non-competes between employers and workers, it does not explicitly ban non-disclosure agreements, customer non-solicitation agreements, or employee non-solicit agreements. To the extent existing agreements contain these provisions, they may still be enforceable. It is important to note, however, that the Rule does prohibit these other forms of restrictive covenants when they have the same functional effects as non-compete clauses. Assuming the Rule stays on track to become effective in September 2024, this is likely to be a continued area of litigation.

More specifically, the Rule provides that non-disclosure covenants may operate as a non-compete, where “they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.” The FTC states that these broad non-disclosure agreements “function to prevent a worker from working for another employer in the same field and are therefore non-competes under [the Final Rule.]”

Key Points

• The ban covers all non-competes for U.S. workers (including employees, independent contractors, volunteers, interns, and externs) with some very limited carve-outs and is subject to certain exceptions based on the FTC’s statutory authority.
• Non-competes are defined 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.” These terms should be construed broadly.
• The Rule bans new non-competes after the effective date, but also invalidates existing non-competes subject to few exceptions also after the effective date.
• The Rule will not apply to any cause of action, such as a breach of an existing agreement, that accrues prior to the effective date.
• State laws: State laws are preempted by the Rule but only where a state’s laws permit or authorize conduct prohibited under the Rule or conflict with the Rule’s notice requirements. For example, the Rule allows for customer non-solicitation provisions, but in states like California where customer non-solicitation provisions are not permitted, such provisions will continue to be void. The patchwork of state-level income requirements for non-competes would also remain in effect.
• Notice requirement (the Notice): Prior to the effective date of the Rule, employers will need to provide Notice to each worker who is subject to a non-compete that violates the Rule and is no longer enforceable if the employee has provided a current mailing address, email address, or cell phone number to the employer. The Notice must: (i) identify the person who entered into the non-compete clause with the worker; and (ii) be provided via mail, email, or text message to the worker.

Notable Exceptions

While the FTC has provided several specific exceptions to the Rule, these exceptions generally are not applicable to transitioning securities industry professions. The exceptions include:

• Industry carve outs: there are industry-specific exceptions to the Rule, but those exceptions do not include broker-dealers or registered investment advisor firms.
• Senior executive agreements may not void under the Rule, but new non-competes with executives are not permitted. There is an income threshold of $151,164 for this exemption to apply and the executive must have policy-making authority for the entire organization. This exception will be very limited.
• Sale of a business: the Rule does not apply to non-competes entered into in connection with the bona fide sale of a business. The FTC has not provided any specific guidance on what constitutes the sale of a business and whether that exception could apply to the sale of a book of business.

Other Restrictive Covenants Not Subject to the Rule

Despite the very narrow available exceptions to the ban on non-competes, other types of restrictive covenants likely remain enforceable, provided they are reasonably tailored so as not to have the same effect as a non-compete. These include:

• Non-solicitation agreements are not covered by the Rule unless they are the functional equivalent of a non-compete as described above. Narrowly tailored provisions, such as those limited to the representatives existing book of business, are not likely to be affected.
• Non-disclosure agreements are not covered by the Rule, again unless they are the functional equivalent of a non-compete as described above. Generally, these provisions are likely to remain enforceable. This means agreements that specifically address customer lists or similar contact information are likely to remain enforceable.
• Training repayment provisions are similarly not covered by the Rule, unless they are the functional equivalent of a non-compete. Generally, these provisions are likely to remain enforceable.
• Garden Leave provisions are generally not considered to be non-competes because the employee remains employed and receives the same total annual compensation and benefits on a pro rata basis. The Rule would not impact garden leave provisions.
• Fixed-term employment agreements with non-competes during the employment term are not covered by the ban.

What Comes Next?

• The Rule becomes effective on September 4, 2024, unless there is a stay against its enforcement or some similar juridical intervention.
• As of the writing of this advisory, three lawsuits challenging the Rule have already been filed: one in the Northern District of Texas, one in the Eastern District of Texas, and one in Pennsylvania. Additional challenges are likely to be made before the effective date, and we anticipate that at least some of the challenges will be successful to some degree.
  • • Ryan, LLC v. Federal Trade Commission, was filed on April 23, 2024. Plaintiff, Ryan, LLC, is a global tax services firm that uses post-employment non-competes in its shareholder agreements and with some employees “who have access to particularly sensitive business information” to protect confidential information and business strategies and prevent departing principals from poaching clients and employees. The Complaint seeks a judgment vacating the Rule, alleging (1) the FTC lacks statutory authority to issue the Rule, (2) the Rule is unconstitutional, and (3) that the FTC is unconstitutionally structured. The court issued an expedited briefing schedule that aims to allow ruling on the claims by early July 2024. See Ryan, LLC v. Federal Trade Commission, 3:24-cv-986, United States District Court for the Northern District of Texas, filed April 23, 2024.
    • In U.S. Chamber of Commerce v. Federal Trade Commission the Chamber of Commerce is seeking a preliminary injunction to prohibit the FTC from enforcing the Rule and postponing the Rule’s effective date based on the same legal arguments made in Ryan, LLC above. See Chamber of Commerce for the United States of America et al. v. Federal Trade Commission et al., 6:24-cv-00148, United States District Court for the Eastern District of Texas, filed April 24, 2024.
    • In ATS Tree Services v. Federal trade Commission, a small Pennsylvania company with 12 employees focused its claim on the necessity of non-competes to safeguard specialized training. It also named all five FTC commissioners as defendants. Similar to Ryan, LLC, and Chamber of Commerce, ATS Tree Services seeks an injunction and alleges (1) the FTC lacks statutory authority to issue the Rule; and (2) the Rule is unconstitutional. See ATS Tree Services, LLC v. Federal Trade Commission, et al., 2:24-cv-1743, United States District Court for the Eastern District of Pennsylvania, filed April 25, 2024.

What Should You Do Now?

• Follow whether the rule is enjoined in the short term and whether it is overturned by any of the pending litigation.

• Review existing agreements to determine the potential impact of the Rule. Take note of other restrictive covenants and severance provisions.

• Keep in mind that restrictive covenants will continue to be governed by state law.

• Draft new provisions carefully to protect legitimate, defined interests, such as trade secrets, proprietary information, and other confidential information. Ensure such provisions are reasonable in duration, geography and prohibited activities.

• Draft agreements to allow for severance of any provisions that may be found to be unlawful.

• Plan to provide notice at the effective date, including determining whether any exemption applies.