Last week the FTC announced its long anticipated final rule on noncompete agreements. The final rule largely follows the previously published draft and bans noncompete agreements in most circumstances. There are, however, some exceptions. Furthermore, the rule is not yet law and may not become law.
First, the exceptions. Under the final rule a noncompete agreement is impermissible except for noncompetes entered into pursuant to a bona fide sale of: a business entity; all or substantially all of the entity’s assets; or the person’s ownership interest in the entity. The rule also does not apply to existing noncompete agreements with “senior executives”. The rule applies to employees and independent contractors or other “workers”.
“Senior executive” means a worker who, at the time the noncompete was signed, was in a policy-making position and received total annual compensation of at least $151,164 in the preceding year, or when annualized if the worker was employed during only part of the preceding year. Salary, commissions and nondiscretionary bonuses count towards the total, but the cost of lodging, board and fringe benefits do not. Since the bonus must be nondiscretionary an employer cannot pay a large discretionary bonus in an effort to make an existing noncompete enforceable against a departing employee.
Policy-making position means president, CEO or equivalent , or any other officer who has policy-making authority. Policy-making authority is defined as final authority to make decisions that control significant aspects of a business entity or common enterprise. This does not include those executives who have authority for policy decisions for only a subsidiary or affiliate of a common enterprise.
The rule does not specifically refer to non-solicitation provisions. Additionally, in a change from the previously published draft, broad confidentiality provisions are no longer specifically included in the definition of noncompetes. However, as discussed below this does not mean that overbroad nonsolicits and confidentiality provisions would automatically survive a challenge under the FTC final rule.
Unless one of the exceptions applies, it is illegal to enter into or attempt to enter into a noncompete clause, to enforce or attempt to enforce a noncompete clause or to represent that the worker is subject to a noncompete clause.
Within 120 days from publication of the final rule in the Federal Register employers must give notice to non-Senior Executives subject to a noncompete that the noncompete is no longer in effect and will not be enforced. The final rule contains a model notice for employers to copy or use as a guide.
Will the rule become law? To be determined. There are already two lawsuits pending in Texas seeking to enjoin the rule from becoming law. More litigation could follow.
To prepare for the rule possibly becoming law employers should do the following:
- Review existing noncompetes to see if the rule bans them.
- Review other restrictive covenants (non-solicits and confidentiality agreements) to see if they could be legitimately viewed as noncompetes. If the clause prohibits or prevents a worker from seeking or accepting work in the U.S. then it could be considered a prohibited noncompete.
- Prepare a notice for any noncompete that is prohibited. Employers should generally follow the model notice to avoid any argument that they failed to comply.
- Before the effective date of the final rule (120 days from Federal Register publication) enter into a noncompete with any Senior Executive that does not have one.
And, when in doubt, call your employment lawyer!