On May 7th, 2024, the Federal Trade Commission of the United States of America (“FTC”) published a final rule to promote competition by banning noncompete agreements nationwide (with the inclusion of Puerto Rico) between employers and their workers (“Final Rule”) pursuant to Section 5 of the Federal Trade Commission Act (“FTC Act”). This notice to clients (“Notice”) examines some aspects of the Final Rule, such as its ramifications in the legal fields of Corporate, Intellectual Property, and Labor.
The Final Rule
The Final Rule provides that it is an unfair method of competition for persons to, among other things, enter into non-compete agreements with workers on or after the Final Rule’s effective date. Therefore, the Final Rule provides a comprehensive ban on any new or existing non-compete agreements (“Non-Competes”). The FTC did make a limited exception for existing Non-Competes for Senior Executives (as defined in the Final Rule) versus workers of any employer. The FTC has also clarified that the Final Rule does not limit the enforcement of state laws that prohibit Non-Competes but preempts any State law that conflicts with the Final Rule. The Final Rule is effective 120 days after publication in the federal register (“Effective Date”), which falls on September 4, 2024.
Non-Competes
Non-Competes are defined in the Final Rule as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- 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
- operating a business in the United States after the conclusion of the employment that includes the term or condition.
The Final Rule provides that a “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral, meaning it would include both employees and independent contractors. The Final Rule also defines “Worker” as a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.
Ban’s Scope
The Final Rule’s effectively bans any new Non-Competes and voids most existing Non-Competes with the exception of the senior executive workers. The Final Rule provides some exceptions for certain circumstances that existed prior to the Effective Date.
Exceptions
The FTC has provided that the Final Rule will not apply to Non-Competes entered into by a person when it involves 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 interests. The Final Rule will also be inapplicable where a cause of action related to a Non-Compete accrued prior to the Effective Date. Additionally, the Final Rule provides that enforcing or attempting to enforce a Non-Compete where a person has a good-faith basis to believe the final rule is inapplicable is not an unfair method of competition. Furthermore, the Final Rule is inapplicable to Senior Executives – highly paid Workers with the highest levels of authority in an organization – because of their role in any organization. Thus, existing Non-Competes with Senior Executives are valid. As such the Final Rule defines “Senior Executive” as a Worker who was in a policy-making position and who received from a person for the employment:
- Total annual compensation of at least $151,164 in the preceding year; or
- Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or
- Total compensation of at least $151,164 when annualized in the preceding year prior to the Worker’s departure if the Worker departed from employment prior to the preceding year and the Worker is subject to a Non-Compete.
As provided by the Final Rule, a “Policy-Making Position” is a business entity’s president, chief executive officer, or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. Furthermore, having “Policy-Making Authority” means having the final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise. Additionally, note that the minimum compensation required above includes any bonuses the Senior Executive may receive. As such, total annual compensation may include salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during the preceding year. However, the Final Rule will proactively ban any Non-Compete with Senior Executives immediately after the Effective Date.
Notice Requirement
The Final Rule requires that all employers provide notice to their Workers with existing Non-Competes that they are no longer enforceable. For the benefit of employers, the Final Rule includes model language that satisfies the requirement.
Protecting Confidential Information and Intellectual Property under the terms of the Final Rule
As a result of the Final Rule, companies should revisit and strengthen viable means for protecting valuable investments such as Confidentiality and Non-Disclosure Agreements (“NDA”), trade secrets, patents, trademarks, and copyrights, and strengthening their data protection capabilities to ensure they support their trade secret protection protocol.
Non-Disclosure Agreements
The Final Rule only applies to non-competition clauses and does not ban other restrictions such as confidentiality or non-solicitation provisions. Specifically, the FTC stated that an NDA would not be a non-compete under § 910.1, where the NDA’s prohibitions on disclosure do not apply to information that: (1) arises from the worker’s general training, knowledge, skill, or experience, gained on the job or otherwise; or (2) is readily ascertainable to other employers or the general public. In other words, an NDA that is narrowly tailored to its purpose of protecting proprietary and confidential information will not conflict with the Final Rule.
Trade Secrets, Patents, Copyrights and Trademarks
Companies should also shift their focus to well-established means of protecting their intellectual property through securing patent, copyright, and/or trademark registrations.
- Trade secrets are information that (1) is not generally known to the public; (2) confers economic benefit on their holder, and (3) the holder makes reasonable efforts to maintain its secrecy. Trade secrets include information such as formulas, practices, processes, designs, instruments, patterns, or compilations of information that have inherent economic value. Trade secret protection is indefinite if the holder protects the secrecy of the information, for this reason, it is of paramount importance to have in place strong security measures and protocols, such as limiting access to trade secrets only to key personnel.
- Patent law provides inventors with the right, for a 20-year period, to exclude others from making, using, offering for sale, or selling an invention or importing it into the U.S.
- Copyright protection is available to authors of works such as computer source code, web design, presentations, images, and audiovisual content, among others. Under copyright law, authors have a right to the exclusive economic exploitation of their works for the life of the author plus an additional 70 years.
- Trademarks can be any word, phrase, symbol, design, or a combination of the former, that serve as source signifiers for goods and services. Trademark protection will last for as long as the trademark remains in use in commerce.
Additionally, companies should further protect their property interests in these forms of intellectual property through assignment agreements; by including clear work-for-hire provisions on independent contractor’s agreements; and by including moral rights waivers as each case may require.
All the measures stated above, combined with NDAs, create a powerful deterrent to post-employment disclosures of trade secrets and confidential proprietary information, protecting valuable investments in the absence of non-competes.
What should employers do?
Employers should evaluate executive and employment agreements and policies and consider other options such as implementing tailored non-solicitation agreements, non-interference agreement, non-disclosure agreements, training repayment agreements provisions, and the like, to comply with the Final Rule and at the same time protect their legitimate business interests. Employers should not enter into any terms and conditions that will have the same effect as a Non-Compete. Employers should take this opportunity to enhance their measures to protect confidentiality, trade secrets, and emphasize the importance of maintaining professional ethics and integrity within the organization. By adapting their practices to the evolving legal landscape and prioritizing fair and equitable employment practices, employers can effectively address this transition and foster a positive and productive workplace environment.
Legal Challenges to the Final Rule
The Final Rule was challenged in court immediately, with the United States District Court for the Northern District of Texas consolidating two cases that were filed against the FTC concerning the Final Rule. As such, the enforceability of the Final Rule, its application and scope, and its Effective Date could very well change slightly or dramatically depending on the legal outcome of the challenges. Employers should monitor the legal proceedings as the key dates for the Final Rule’s enforcements get closer. Finally, beyond the challenge at the federal level, how the Final Rule plays out at the state level will vary on a state-by-state basis. Any decision concerning an employer’s application of the Final Rule should be discussed with their legal team prior to execution.