LEGAL UPDATE:
On August 20, 2024, the U.S. District Court for the Northern District of Texas set aside the FTC’s non-compete rule and blocked enforcement of the rule nationwide for all businesses.
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On September 4, 2024, the FTC’s rule banning non-competes will take effect. This is a broad ban that prohibits entering into, attempting to enter into, and even representing that a non-compete is enforceable. It applies throughout the U.S. and supersedes state law.
There are only two exceptions to this rule. The first is for senior executives, but is very limited. To fit within this narrow carve-out, the executive must make at least $151,164/year and be in a policy making position. Also, this exception only applies to non-competes that were entered into on or before September 4, 2024. In other words, the exemption doesn’t apply to non-competes signed after September 4, 2024. The second exemption is for non-competes that have been entered into pursuant to a bona-fide sale of a business.
There are a number of lawsuits challenging this rule and courts have enjoined it, but those decisions only benefit the plaintiffs in those cases. There are strong arguments that suggest a court will stop the implementation of the rule and an important decision is expected on August 30. However, that’s not certain and it’s very possible it will take time for the courts to fully resolve these issues.
To plan for this September 4, 2024 deadline, you should do the following:
- Review your existing non-competes. You should take an inventory of who your business has non-compete agreements with. In particular, you should create a list of what employees or other parties are covered and whether any exemptions I’ve mentioned above apply.
- Provide notice to those employees. The FTC rule requires that prior to September 4, you must inform employees who are subject to non-competes that they’re no longer enforceable. This notice needs to be given specifically to the individual employee. In other words, the notice can’t be given to a group of employees. Also, the notice must be provided in a very specific way (i.e. hand delivered, mailed to the last known address, emailed, or texted).
- Only enter into certain non-competes. The FTC rule is very broad and after September 4, 2024, only non-competes that are entered into in connection with a bona-fide sale are valid. Until the legality of the rule is resolved in the courts, you shouldn’t enter into new non-competes unless they’re part of a business sale. That being said, the rule doesn’t apply to other restrictions such as non-solicitation arrangements. So, these types of agreements are still an option to legally protect your customers and the business.
