Breaking Down FTC's Non-Compete Ban

Non-compete agreements have traditionally been used to safeguard employers from unfair competition or practices from departing employees. However, after the new Federal Trade Commission ruling goes into effect on September 4th, almost all non-competes will be rendered unenforceable.

WHAT THE COMMISSION IS SAYING

The FTC believes non-compete agreements are stifling economic growth and innovation. According to FTC Chair Lina M. Khan, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism.” Here’s what they’re doing and why it matters:

BREAKING DOWN THE RULING

The FTC’s final rule was published in the Federal Register on May 7, 2024 and spans a hefty 570 pages. Here are the CliffNotes::

• ‍Broad Strokes: The ruling defines non-competes as any agreements that stop or penalize an employee for getting a new job or starting a business post-employment. This includes forfeiture-for-competition provisions, and severance deals that hinge on not competing.
• ‍Limited Conduct: Overly broad nondisclosure agreements (NDAs), non-solicitation agreements, and no-hire contracts that act like non-competes are also considered no-nos.
• ‍Prohibited Conduct: Employers can no longer:
  • Enter into or attempt to enter into a non-compete clause.
  • Enforce or attempt to enforce a non-compete clause.
  • Represent that an  employee is bound by a non-compete clause.

EXEMPTIONS AND RETROACTIVITY 

The rule lists three exemptions, though, practically, there are really only two, and one of those is temporary:

• Noncompetes entered into in connection with a bona fide sale of business, meaning, the sale of the person’s ownership interest in a business entity or of all or substantially all of a business entity’s operating assets.
• Causes of action concerning non-competes that accrued prior to the effective date.
• Enforcement or attempts to enforce a noncompete, or making representations about a noncompete, where the person has a good-faith basis to believe that the ban is inapplicable.

The Rule will operate retroactively for all noncompetes except those agreed to by “senior executives” (to the extent the senior-executive noncompetes were agreed to before the effective date of the Rule).

Senior executives are a very limited group. To qualify as such, the employee must:

• Be in the C-suite or an equivalent role.
• Have final say over big business decisions.
• Earn more than (an oddly specific) $151,164/year, excluding discretionary bonuses, board, lodging, payments for medical, dental, or vision insurance, retirement contributions, or other “fringe benefits”.

All Workers. The final rule is not limited to non-competes with only employees. It includes all workers, including independent contractors, interns, externs, and volunteers.

But Not All Industries. The ruling also does not apply to industries over which the FTC does not have statutory authority, including nonprofits and certain banks, savings and loan institutions, and federal credit unions. 

HOW WILL THE FINAL RULE BE ENFORCED?

The rule can be enforced in two ways:

• FTC enforcement actions. The FTC could initiate either an administrative proceeding or seek an injunction in federal district court against any defendant that “is violating, or is about to violate” the final rule where an injunction is in the public’s interest. The FTC is unlikely to be able to seek monetary relief for violations of this rule because, under the FTC Act, it may not have the authority to seek penalties for unfair method of competition. The FTC can, however, obtain civil penalties in court if a party fails to cease and desist from a violation after being ordered to do so.
• Civil litigation. Although there is no private right of action under the FTC Act, an aggrieved employee can file an action seeking a judgment from the court declaring that any illegal non-compete is unenforceable. There may also be other potential claims, including claims for actual and punitive damages, depending on whether an employer attempts to enforce an illegal non-compete.

WHAT WORKERS ARE SAYING

Employees are largely cheering from the sidelines. For many, non-competes have been a major roadblock, stifling their career mobility and ability to negotiate better wages and opportunities. The new rule is seen as a win for worker freedom, allowing them to move more freely between jobs and pursue their professional ambitions without the looming threat of legal action from former employers.

WHAT EMPLOYERS ARE SAYING

Finding and keeping top talent is already tough enough, and these new measures could throw another wrench in the works. 

Dealers argue that non-competes are crucial to protect their investments in training and development. After all, who wants to train an employee only to watch them take their skills to a competitor? They want to ensure that the information and training that has been imparted to their employees is protected. 

They also want to protect confidential information like customer lists, pricing strategies, unique selling methodologies, and other proprietary data to ensure employees cannot steal their “secret sauce.”

STATE-BY-STATE

For over 200 years, non-compete agreements have been governed by state laws that vary widely across jurisdictions. Until recently, the FTC has not actively engaged in regulating non-compete agreements between employers and their workers. That changed in late 2022 with the FTC’s policy announcement about non-competes, followed by its announcement that it had entered into consent decrees arising out of two enforcement actions accusing employers of engaging in unfair methods of competition by using non-competes.

In fact, the new ruling will not preempt existing state laws, except to the extent state law allows conduct that is deemed a method of unfair competition under the final rule.

Here are the the states with existing non-compete restrictions: 

WHAT CHALLENGERS ARE SAYING

Dealers aren’t alone in thinking the FTC has overstepped their bounds. The ruling is also facing some legal challenges from fellow government agency, the U.S. Chamber of Commerce, among others. 

The lawsuits allege that the new ruling is arbitrary, capricious, or otherwise unlawful, and that the FTC lacks the authority to issue binding regulations regarding “unfair methods of competition.”

Businesses are taking to the courts as well. For example, ATS Tree Services is suing the FTC in the Eastern District of Pennsylvania. As alleged, “ATS uses reasonable non-compete agreements to ensure that it can provide its employees with necessary and valuable specialized training while minimizing the risk that employees will leave and immediately use that specialized training and ATS’s confidential information to benefit a competitor.” 

COUNTDOWN TO KICK-OFF

Pending the outcome of those legal battles, the final rule is set to kick in on September 4, 2024. 

While this gives some time to prepare, the retroactive effect means existing non-competes will be invalid once the rule is in play, so it’s important to do some prep work.

WHAT SHOULD DEALERS DO?

1. Wait and See. Hang tight while the lawsuits play out and hold off making any hasty changes just yet. It’s possible that the legal challenges will cause the effective date of the ruling to be delayed, or even thrown out entirely. 
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2. Don’t Panic, Prepare. In the meantime, it’s probably a good idea to refresh your knowledge on and practices of non-compete agreements and how they function at your dealership, just in case.some text
   1. Decide on your company’s strategy for compliance before the new regulations take effect.
   2. Assess current non-compete agreements, plans, and policies.
   3. Evaluate and enhance the protection of trade secrets and confidential information. This is a pretty comprehensive checklist for evaluating your trade secret protection.
      
3. Have a Plan. If things pass in their entirety as they stand now, dealers will be required to:
   
   1. Tweak the existing language of their NDAs to ensure they follow these new guidelines.
      
   2. Notify all employees both present and past that they are no longer bound by the non-compete agreement.
      
      Dealers must send a "clear and conspicuous" notice to all affected employees, declaring their non-compete clauses are void. This notice has to ID the person who inked the deal and be delivered via hand, mail, email, or text. The FTC has created a template to help make this easier for businesses.‍

‍FINAL THOUGHTS‍

If the ruling goes into effect in September, it will be a game-changer, but that’s nothing new to our resilient industry. As always, keep your game plan flexible and be ready to adapt.