The United States government is stepping into the continued controversy over non-compete agreements. The FTC issued a final Non-Compete Clause Rule on April 23, 2024. The rule becomes effective 120 days after it is published in the Federal Register. This significant development will impact businesses and employees across the country.
Here, we explain what you need to know about the new rule and what it means for non-compete agreements. The skilled Kentucky employment lawyers at Abney Law are ready to help your company comply with the new rule and the laws in your state.
What Is a Non-Compete Agreement?
A non-compete agreement is a separate contract or clause within an agreement that prevents an employee from accepting a new job that is considered in direct competition with the employee’s previous company. These agreements are often used to protect valuable trade secrets, client lists, and other proprietary data from leaving with an employee when they move on to a new job.
Non-competes have always been subject to limitations, such as reasonableness restrictions on geographical scope or duration. They must also be very specific in what they prohibit, as ambiguity often operates to negate non-compete agreements.
The Federal Trade Commission’s New Non-Compete Rule
The U.S. Federal Trade Commission (FTC) recently released its new rule banning non-competes, although the rule will not take effect until 120 days after the rule is entered into the Federal Register. The new rule bans almost all non-compete contracts and clauses between workers and employers. However, it does not specifically ban other contracts designed to protect employer data and rights, such as:
- Non-disclosure agreements
- Non-solicitation agreements
- Employee non-solicit contracts
According to FTC Chair Lina M. Khan, “Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.” The FTC further argues that banning non-competes will help foster job creation and flexibility within the marketplace.
What Does the Rule Prohibit?
The rule will effectively ban any new non-compete agreements for the future, and mean that any existing non-compete agreements will become unenforceable from the rule’s effective date. Existing non-competes for company senior executives may remain in effect, but employers may not create any new non-compete clauses for these or other employees.
The rule also prohibits otherwise permissible contracts if they operate substantially the same as a non-compete, or effectively prohibit the same type of conduct. For example, if a non-compete language is hidden within a non-disclosure agreement, the non-compete provisions would be wholly unenforceable. If contractual language would forbid a worker from working in the same field or function to do the same it may be treated as a non-compete agreement.
Is the FTC’s Non-Compete Ban Enforceable?
Business and trade associations across the country will challenge the Final Rule and seek an injunction against its enforceability. The rule potentially violates the constitutional limits of a federal agency. The rule may violate the major questions doctrine, a constitutional interpretation rule that Congress must provide direct and clear authority to agencies which enact rules of vast political and economic significance.
It may also violate the non-delegation doctrine, which states that Congress cannot transfer powers which should be exclusively and strictly held within the legislature’s authority. While Congress may delegate many important tasks, opponents of the new Final Rule will likely argue that this non-compete ban is an impermissible delegation of power.
To be sure, the question of the ban’s enforceability will be subject to multiple challenges and lawsuits. Businesses should rely on their employment contract lawyer for help navigating this changing area of law.
Get Help With Non-Compete Agreements
Non-compete agreements may be banned under the new rule, assuming it is enforceable. However, there are several other legal options to protect your critical data, trade secrets, and more.
Let the dedicated employment law attorneys at Abney Law determine the best way to handle non-compete agreements and other methods to protect your company’s valuable assets. Contact us today for a consultation of your case.