On April 23, 2023, the Federal Trade Commission (“FTC”) issued a final rule imposing a broad restriction on non-competition agreements (“Final Rule”). The Final Rule requires employers to rescind existing non-compete agreements and would preempt conflicting state laws. The Final Rule is effective 120 days from its publication in the Final Register.
The Final Rule defines “non-compete clauses” as follows: any agreement that prevents a worker from, or penalizes a worker for, seeking or attempting to seek employment with any employer after the termination of their current employment.
The Final Rule mandates that it is a prohibited unfair method of competition to enter into or “attempt to enter into” a non-compete clause with an employee, or to enforce an existing non-compete agreement, or to represent to an employee that they are subject to a non-compete without a good faith basis to believe they are.
Accordingly, the Final Rule not only requires employers not to enter into or “attempt to enter into” employee non-compete agreements, it also requires employers to rescind their existing non-compete agreements, and then notify the current and former employees that the non-compete is rescinded within forty-five days of the rescission. The Final Rule provides a form for the notice of rescission. The obligation to rescind existing non-compete clauses does not apply to where a cause of action related to a non-compete clause accrued prior to the effective date.
There are a few exceptions. The ban will not apply to sales of a bona fide business or its assets. The Final Rule has limited application to “senior executives”. For those employees, it is considered an unfair trade practice to enter into or attempt to enter into a non-compete clause, or to enforce or attempt to enforce a non-compete entered into after the effective date, leaving employers free to enforce non-compete clauses entered into with senior executives prior to the effective date. The Federal Trade Commission Act, which provides the authority for the Final Rule, also does not apply to the following industries: banking, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers and certain persons subject to the Packers and Stockyards Act. It also does not apply to franchisors and franchisees (although it does apply to their employees).
Employers should prepare for the effective date, although legal challenges are inevitable. This requires employers to identify which employees are subject to non-compete clauses and to determine whether they are required to rescind those provisions. Employers should consider whether they have appropriate measures in place to protect customers and confidential information.
Employees should review their own employment agreements to determine what post-employment restrictions are in place and ensure compliance.
The attorneys at Antheil Maslow & MacMinn are available to assist with navigating this new Final Rule and will continue to provide updates as they become available. To learn more about employment law services at AMM Law, visit ammlaw.com/employment.