The use of non-competition covenants in employment agreements has been on the ropes for several years, increasingly so after the Federal Trade Commission (FTC) proposed a rule banning such covenants in 2023. The FTC has now issued its final rule in an attempt to deliver a knock-out blow for this controversial issue in employment law.

The FTC has formulated a two-pronged rule, banning virtually all employers from entering into, enforcing or attempting to enforce post-employment non-competition covenants with workers and also taking the extraordinary measure of invalidating existing non-competes. The rule is broad in its scope, prohibiting non-competition covenants with workers, which includes employees, independent contractors, sole proprietors providing services and beyond. The FTC does provide exceptions for non-competition covenants entered into in connection with the sale of a business and causes of action regarding non-competition covenants that arise prior to the rule taking effect. In addition, the rule provides a limited exception allowing the enforcement of non-competition covenants with certain senior executives that were entered into prior to the effective date of the rule (but prohibits such agreements with senior executives following the effective date).

The FTC offers a uniform national approach to eliminate non-competition covenants. While such covenants have become increasingly disfavored throughout the United States, legislation has been limited to local and state bans, which have typically targeted the use of non-competition agreements in specific industries or pertaining to specific types of workers. For example, Connecticut has regulated non-competition covenants for security guards, broadcast employees, physicians and home health care, companion and homemaker employees.  Conversely, the FTC rule applies to almost all employers across all industries.  

The rule is scheduled to become effective on or about September 4, 2024, barring a successful legal challenge to the final rule. Legal action to that effect is currently underway. In fact, on July 8, 2024, the U.S. District Court for the Northern District of Texas in the case of Ryan LLC v. Federal Trade Commission granted the plaintiffs’ request for a preliminary injunction postponing the effective date of the FTC’s rule. The decision applies only to the specific plaintiffs in that matter. However, the Court indicated that it will rule on the merits of the case prior to September 4, 2004. In the meantime, employers should consult with counsel to perform an audit of their restrictive covenant practices. All agreements, plans and policies that incorporate non-competition covenants should be carefully reviewed; employers should also review their agreements, plans and policies that incorporate non-solicitation covenants, as such covenants will remain enforceable and may offer the employer the best opportunity to protect its business interests. Employers should also be making contingency plans to comply with this potential change. Furthermore, if employers desire non-competition covenants with senior executives, such agreements must be entered into before the final rule takes effect. Otherwise, employers can wait to see if and when the FTC’s rule becomes law.

Regardless of whether this rule becomes law, the trend is unmistakable – non-competition covenants in the employment context are on borrowed time. Employers must start making contingency plans and considering their use of restricted covenants in the near future. For more information, please contact Daniel B. Fitzgerald or another BW attorney.

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