FTC Bans Non-Competes

“Upset at you for breaching your non-compete? Of course not.”

Ruling wipes out all non-competes with limited exceptions

by Bill Honaker, The IP Guy

On April 23,2024, the FTC issued its Proposed Final Rule banning all new, and nearly all existing, non-competes. The final rule goes into effect 120 days after publication in the Federal Register. This could happen within days, making the rule enforceable by the end of August 2024. The final rule provides that it is an unfair method of competition and therefore a violation of Section 5 for employers to enter non-compete clauses with workers on or after the final rule’s effective date. Employers must provide notice to workers with existing non-competes that they are no longer enforceable.

Workers are very broadly defined in the Rule. Under the Rule, a worker is:

  1. a natural person who works, or who previously worked, whether paid or unpaid, without regard to the worker’s title or status under any other State or Federal laws,
  2. an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person,
  3. a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.

There are exceptions to the rule. The rule doesn’t apply to:

  1. Existing non-compete agreements with “senior executives.” The Rule defines a “senior executive” as workers earning more than $151,164 annually who are in a “policy-making position.”
  2. Non-Compete agreements entered pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
  3. Causes of action related to a non-compete clause accrued prior to the effective date.
  4. Situations where there is a good-faith basis to believe that the Rule is inapplicable.
  5. To non-profit organizations.

The Rule defines a “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:

  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. What’s uncertain is when this rule will take effect. It’s already being challenged by Ryan, LLC in the Northern District of Texas. The case was filed on the same day the rule was announced. The next day, April 24, 2024, the US Chamber of Commerce filed suit in the Eastern District of Texas. The American Hospital Association has indicated that they will challenge the Rule.
Bill Honaker
Bill Honaker, The IP Guy

Give me a call if you would like if you would like to discuss your agreements under the new Rule.

To get answers to your questions about anything IP click here. To schedule a time to talk, email Bill@IPGuy.com, or give him a call at 248-433-7381.

Bill Honaker, “The IP Guy” is a former USPTO Examiner, a partner with Dickinson-Wright, and author of the new book, Invisible Assets – How to Maximize the Hidden Value in Your Business. To download a sample chapter click here. You can also find more articles about IP, patents, trademarks, and trade secrets at IPguy.com.

 

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