The general rule on noncompete clauses in many states has been unchanged for some time. Unless there’s a public policy reason to declare them void, noncompetes are generally enforceable as long as they are reasonable in time and scope and narrowly tailored to protect the employer’s legitimate business interest without imposing an undue hardship on the affected employee. That rule, however, may have just ended—for the most part.
FTC Vote
On April 23, 2024, the U.S. Federal Trade Commission (FTC) voted 3-2 to approve a final rule outlawing most noncompetes nationwide. Specifically, the final FTC rule states that effective August 2024, businesses may not enter into noncompetes with employees other than senior executives, nor may businesses enforce existing noncompetes against such employees. When the employee at issue is a senior executive, existing noncompetes can remain in effect, but no new noncompetes can be entered into as of August 2024.
Certain exceptions exist. For example, noncompetes are still allowed when entered into in connection with the sale of a business. And for businesses already in litigation with their former employees, the FTC announced its new rule isn’t intended to take away claims for damages that accrued before August 2024.
Changes Ahead
The FTC’s new regulations, once they go into effect, could effectively preempt and replace existing state law on the subject, which means existing state rules could be effectively out the proverbial window for most employees.
With the FTC regulations being only recently announced, and no litigation having yet been decided concerning them, there are many moving parts to the new regulations. Businesses are well advised, in the coming months, to keep an eye on issues including the following:
Keep an eye on the courts’ next moves. Pro-business entities such as the U.S. Chamber of Commerce have vowed immediate litigation to prevent the FTC’s final regulations from taking effect. There may also be local litigation on the issues as well. Net-net, you should keep a close eye on state and national litigation in the coming months to stay abreast of your obligations, if any, under these regulations.
Get your notices ready. Assuming the regulations do take effect in August 2024 as planned, businesses with existing noncompetes will need to issue notices to all affected employees, other than senior executives, informing them that their noncompetes are now null and void. The FTC final regulations contain a model notice that you can use as well as a safe harbor provision that ensures you will be in good standing if you use the provided notice.
Check your handbooks and your contracts. As August 2024 approaches, it would be wise to double check what policies and agreements you have in place. Any verbal or written rule, even if not reduced to the form of a contract, can be deemed to violate the new FTC regulations and require the notice described above. For that reason, a careful internal audit of existing contract and policy language is in order.
It’s time to call your attorney. As always, the devil is in the details with these regulations. To ascertain how the new regulations apply to your business (e.g., whether a certain policy constitutes a noncompete, what notice obligations a business may have in connection with noncompetes previously entered into with non-senior executives, and whether a particular employee can rightfully be considered a “senior executive”), and to otherwise strive to ensure full compliance with the FTC’s new rules, you’re advised to work with competent employment counsel both now and as August 2024 approaches.
Shannon S. Pierce is an attorney with Fennemore Law in Reno, Nevada, and can be reached at spierce@fennemorelaw.com.