STOP THE PRESSES – THE FTC ISSUES FINAL RULE BANNING THE MAJORITY OF NON-COMPETITION AGREEMENTS!
No, seriously this time: this is a full-blown, five-alarm, all hands-on-deck moment. The Federal Trade Commission (“FTC”) issued a Final Rule TODAY April 23, 2024 – not a “proposed rule,” not a “white letter,” and not an “advisory opinion - a Final Rule – banning the enforcement of non-compete agreements nationwide.
You read that right: starting just one hundred and twenty (120) days from today, not only will a large majority of existing non-compete agreements be invalidated, but no new non-competition agreements will be permitted within any of the fifty (50) states, absent one vey narrow exception: “senior executives” earning $151,164 plus per year may remain bound by existing non-competition agreements, but they may not be asked to sign new non-competition agreements moving forward. Anyone not meeting this extremely specific criteria will be released from their obligation to refrain from competing with a current or former employer one hundred and twenty (120) days from today, regardless of any agreements in place to the contrary.
The FTC even went so far as to require employers to provide notice to any current or former employees with whom they have active non-compete agreements to explicitly inform such employees that such agreements are no longer valid or enforceable. That last part really twists the knife, doesn’t it? Because in many cases – particularly with former employees – employers actually bargained and paid a hefty price for those non-compete agreements. Finding out that the FTC has, by fiat, absolved such employees from their end of those bargains is going to be a bitter pill to swallow. And if you’re reading this, we can safely assume that you’re among the millions (1 in 5 Americans!) of parties who will be immediately affected by the FTC’s new Final Rule. Rest assured that the Sensenig Law Firm is right there with you, trying to figure out how you can not only protect your existing business interests, but how you can avoid inadvertently training your new competition moving forward. So, let’s all take a breath, and consider our next steps, because we mean it when we say we are in this together, now more than ever.
First, let’s take just one moment to be fair to the FTC: as drastic as this new Final Rule is, there are legitimate reasons behind this new Final Rule. Foremost among them is shameless abuse by certain employers attempting to bind low-level employees – minimum-wage earners, physical laborers, day care workers, and others who simply don’t have trade secrets or confidential information to justify binding that employee to a non-compete agreement. A gentle reminder that non-competition agreements protect an employer’s legitimate business interests; such agreements don’t exist to stop employees from freely seeking alternative employment or to dissuade employees from seeking better pay, benefits, or even engaging unionization efforts. After all, if an employee’s non-compete agreement stops that employee from getting another job without hours long commutes, or without packing up his/her life and moving to a new city, county, or even state, that employee is much less inclined to rock the proverbial boat. So, before we get too angry with the FTC, let’s apportion a fair share of blame to the employers who brought this new Final Rule into play by using non-competition agreements as a cudgel, rather than the shield they were intended to be.
The FTC did not come out of nowhere with this new Final Rule. The tides have been turning this direction long before the FTC even considered such drastic action, with no less than five (5) states – California, Colorado, Oklahoma, North Dakota, and Minnesota – banning the enforcement of non-compete agreements outright, and many more states like Oregon and Maine restricting their application to specific employees, specific circumstances, and with notice provisions. Colorado, in particular, made their stance on the matter clear when they made attempting to enforce a non-competition agreement against a former employee a criminal misdemeanor. When California and Colorado find themselves with the same complaints as Oklahoma, North Dakota, and Minnesota, it’s a safe bet that there’s a legitimate grievance going on.
Finally, the FTC has done their homework on this, and the math is undeniable: non-competition agreements may be advantageous for employers, but the numbers provided by the FTC show a detriment for the U.S. economy as a whole because of the effects non-competition agreements. We will give you the numbers straight from the FTC:
“The FTC estimates that the final rule banning non-competes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade. In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.”
Now that we’ve heard the FTC’s “side of things” and apportioned an appropriate amount of shade or blame out to the bad actors, let’s talk about solutions. After all, there are absolutely good-faith, legitimate business interests behind an employer desiring a non-competition agreement. As we hinted at above, you don’t want your business to end up acting as an unwitting training program for your next biggest rival. We’re willing to bet plenty of you reading this have had former employees open up a competing shop down the street, attempting to take half of your customers with them, which is likely what made you start utilizing non-competition agreements in the first place. Thankfully, having seen the writing on the wall thanks to the trend of banning non-competition agreements at the state level, the Sensenig Law Firm has been regularly inserting non-solicitation and non-acceptance provisions into our clients’ standard non-competition agreements for the past year or so. Like we always say at the end of these posts: an ounce of prevention is worth a pound of cure, and we’re proud to report that we take our own advice just as seriously as our clients do.
So, IF the FTC Final Rule is upheld, while you as an employer can no longer prevent – or even attempt to prevent – a former employee from opening up a shoddy version of your own business right across the street, you absolutely can still protect your valued customer base which, let’s face it, was always the point of a good-faith non-competition clause in the first place. We’ve been preparing for this contingency for the better part of a year now, and while we must confess we didn’t foresee this happening so soon (or so abruptly), we’re prepared to adapt, and to help you do the same.
There’s a very large asterisk – shaped like a Lone Star – at the end of all this that you should be aware of, the State of Texas. The federal district courts of Texas have made it their business to thwart administrative actions in the United States; the federal district courts of Texas have an outstanding track record for overturning final rules exactly like this one. Remember when the DOL raised the salary threshold a few years ago to exempt an employee from overtime? While that is back in play as of this week, the Eastern District Court of Texas that previously killed that Final Rule in a single afternoon is likely in a position to do so again for both the FTC Final Rule and the newly released DOL salary basis threshold.
Even now as you’re reading this, lobbyists across the country are on the phone with enormous nationwide companies and their attorneys, discussing how to get this issue in front of their golfing foursomes at any of Texas’ numerous federal district courts. We could write pages and pages about why a single court in a single state can single-handedly overturn years of labor of any given federal agency on a whim, but that’s an essay for a law journal. For our purposes, all you need to understand is that there is a very good chance – we daresay 50% or more – that this Final Rule will be stayed or even dead on arrival and nothing will change.
So why sound the alarm? Well, as a general principle it’s better to prepare for the worst now than to be caught off guard, but in this case, we actually have specific reasons to doubt federal district courts of Texas’ ability to hold back this tide all by themselves. First, you’ve likely heard of the Pregnant Workers Fairness Act (“PWFA”), probably from us, but did you know that the federal district courts of Texas tried and failed to stop its implementation nationwide? Despite their best efforts, they were only able to block the PWFA from taking effect in Texas; as we speak, it is the law of the land in literally every other state. Could the federal district courts of Texas be losing their edge? Could something similar happen here, where non-competition agreements for the next decade are only enforceable in Texas?
From there, there’s the fact that – our particular target audience notwithstanding – this Final Rule is actually overwhelmingly popular. Of the 26,000 plus comments the FTC received, 25,000 plus were in favor of the ban. This is the exact opposite of the typical results, which generally frown on administrative agencies doing much of anything. Even the federal district courts of Texas could want to be on the right side of history and coming off of a fresh loss over the PWFA, they might be disinclined to swim against such an overwhelming tide of support.
Well, there you have it. You can rest assured that you haven’t heard the last of this. Stay tuned for updates – you’ll have every bit of information we do the very same day we learn it ourselves. We are here to help and look forward to your questions.