FTC’s Final Rule Banning Most Noncompete Agreements Already Under Fire in Federal Court
Rob Thomas, Of Counsel
On April 23, 2024, the Federal Trade Commission (“FTC”) issued its final Non-Compete Clause Rule (the “Rule”),[1] which is set to become effective 120 days after it is published in the Federal Register. The Rule would make any new noncompete agreements an unfair method of competition and would render existing noncompete agreements illegal and unenforceable (except when the existing agreement is between an employer and a highly compensated “senior executive”). The Rule has already drawn legal and constitutional challenges in Texas federal court, so the future of the FTC’s Rule remains to be seen.
The FTC’s Non-Compete Clause Rule
The scope of the Rule is both retroactive and prospective, and provides that it shall be an unfair method of competition for any person to 1) enter into (or attempt to enter into) a noncompete agreement; 2) enforce or attempt to enforce an existing noncompete agreement, or; 3) represent that a worker is subject to a noncompete agreement.
The most notable carveout to the Rule’s overall ban is for existing noncompete agreements which currently bind “senior executives” as of the Rule’s effective date, but the Rule still prohibits noncompete agreements being made or entered into after the Rule’s effective date between employers and senior executives. Under the Rule, a “senior executive” is limited to those persons who are in a policy-making position with a company (such as a president, CEO, or equivalent position with the authority to make policy decisions that control significant aspects of a business entity) and who earned total compensation of at least $151,164.00 (actual or annualized) in the preceding year from the employer.
Other exceptions to the Rule include noncompete agreements entered into pursuant to the sale of a business entity, a person’s ownership interest in a business entity, or of substantially all of a business entity’s assets. Likewise, the Rule has no impact on existing legal disputes and causes of action related to a noncompete agreement which accrued prior to the effective date of the Rule. The Rule is also not applicable to the small subset of employers who are not subject to FTC regulation (such as bona fide nonprofit organizations, banks, and air and common carriers).
Under the Rule, any employer with existing noncompete agreements that will be considered an unfair method of competition after the Rule’s effective date must provide “clear and conspicuous” notice to the affected worker(s) that the noncompete agreement will not be, and cannot legally be, enforced against the worker(s). This notice must be issued by the Rule’s effective date, and can be delivered in person, by mail to the last known address, by email, or even by text message.
Pending Legal Challenges
Almost immediately after the FTC issued its rule, the U.S. Chamber of Commerce filed suit on April 24, 2024 in the U.S. District Court for the Eastern District of Texas to enjoin the FTC from enforcing the Rule and for a declaratory judgment that the Rule is arbitrary and capricious and otherwise exceeds the scope of the FTC’s rulemaking authority. [2] The FTC maintains that the Rule is within the scope of its rulemaking authority, would promote competition and increase earnings for workers, and any concerns regarding trade secret protection could be addressed by alternative means (such as nondisclosure and confidentiality agreements).
Potential Impact on Colorado Law Governing Noncompete Agreements
Colorado has some of the most restrictive laws in the country relating to noncompete agreements, but Colorado law nonetheless permits such agreements when they are expressly for the protection of trade secrets, no broader than reasonably necessary to protect the employer’s interest in its trade secrets, and the agreement is made between an employer and a “highly compensated” worker ($123,750.00 annual earnings or more, which is less than the earnings threshold for “senior executives” under the Rule). The Rule, however, has no such carveout for noncompete agreements designed for the protection of trade secrets. Thus, unless an employee qualifies as a “senior executive” under the Rule, any existing noncompete agreements for the protection of trade secrets which may nonetheless be valid under Colorado law will be illegal under the Rule, if it goes into effect.
Employer Considerations
While the fate of the Rule is unsettled given the current and anticipated challenges in court (which may, eventually, go to the Supreme Court for consideration), if the Rule survives and becomes effective, Colorado employers will need to ensure that they notify any affected current or former employees of the lack of enforceability of any noncompete agreements which are effectively banned by the Rule—which is nearly all of them. Campbell Litigation will continue to closely monitor the Rule and court challenges to the same, particularly as the Rule’s effective date approaches.
[1]Available at https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf; see also https://www.rockymountainemployersblog.com/blog/2023/2/9/both-the-us-senate-and-the-federal-trade-commission-propose-regulations-that-would-completely-ban-most-non-competes.
[2]See https://www.uschamber.com/assets/documents/Complaint-Chamber-v.-FTC-E.D.-Tex.pdf for a copy of the Complaint for Declaratory and Injunctive Relief filed by the U.S. Chamber of Commerce.