Noncompetes are now banned, nation-wide
Courts, especially Virginia courts, have long disfavored noncompetes, often ruling them unenforceable, especially when overbroad in terms of duration, scope and geographic reach. But now the Federal Trade Comission (FTC) has one-upped the courts by banning noncompetes nation-wide, with retroactive effect.
The final rule provides that it is an, "unfair method of competition—and therefore a violation of section 5 (of the FTC Act)—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date. With respect to existing non-competes—i.e., non-competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date." (FTC Rule Summary, 23 April 2024)
Let's unpack this a bit.
The Noncompete Ban Applies to More than just Noncompetes
The term "noncompete" is defined more broadly than you think, and even encompasses poorly constructed NDAs and other restrictive covenants, "The term non-compete includes...a non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer." (Section 910.1).
Business owners need be wary of the restrictions they place in their contracts. And employees/ICs should have their offer letters, employment contracts, and IC agreements reviewed by GuideOn Legal Services, prior to execution.
It's Retroactive - Except for "Senior Executives"
Except for a very limited "senior executive" exception, the FTC rule applies retroactively, i.e., your existing noncompete will be deemed null and void once the rule takes effect.
And the exception only applies to a very small subset of "senior" executives. Under Section 910.1, a "senior executive" is a person who was (1) in a policy-making position, and (2) had total annualized compensation of $151,164 or more. "Policy making position" is more narrowly defined than you might guess and applies only to, "a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority." That's pretty limited.
Making it even more narrow in scope, "Policy-making authority" means, "final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise." Simply put, it only applies to those with the authority to make the big decisions at the company.
So if you are a division manager or VP who is not an officer, the exeption to the ban does not apply to you, and your existing noncompete will be void.
Don't forget, the "senior executive" exception only applies to existing noncompetes. Newly hired senior executives are not subject to noncompetes.
Doesn't Apply to Sale of Business Noncompetes
If you sold your business and accepted a non-compete in exchange, the ban doesn't apply and your noncompete restriction remains valid.
"(a) Bona fide sales of business. The requirements of this part 910 shall not apply to a noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets." (Section 910.3). In the originally proposed rule, there were thresholds for this exception, e.g. it only applies if you had a 25% or greater ownership interest in the sold entity, but those caveats were knocked out by industry during the public comment period and will not apply. So, bottom line, noncompetes still apply to sellers of business interests.
Not all hope is lost if you are in this situation (see "Take Action Now" below)
Companies Must Notify Those Subject to Noncompetes
Under the new rule, employers must provide notice to those affected by noncompetes that they are no longer enforceable. To facilitate employer compliance, the final rule includes model language that satisfies this notice requirement (Section 910.2(b)(4)),
"A new rule by the FTC makes it unlawful for us to enforce a non-compete cluase. As of (est. 1 Sep 2024) we will not enforce any non-copet clause against you. This means you may accept a job with any company or any person - even if they compete with us; you may run your own business - even if it competes with us; and you may compete with us following your employment...."
It doesn't get clearer than that...in case you were wondering whether this rule had teeth or not.
Effective August 2024
The final rule goes into effect 120 days after it is recorded in the Federal Register. So expect it to go into effect in late August or early September 2024.
Take Action Now!
If your are business owner, your NDAs and non-solicitation agreements must be carefully re-crafted to avoid being deemed non-competes, so that the baby doesn't get thrown out with the bathwater (even if you don't like babies). And, perhaps more importantly, you will have to look for alternate methods of protecting your business interests and property outside of these traditional means. So, before you send out that next employment agreement, IC Agreement, NDA, non-solicitation, or offer letter, call me for a review (703-397-7490; [email protected]). We'll take care of your legal needs while you focus on growing the business.
If you are subject to an existing noncompete and do not fall under one of the exceptions ("senior executive" or sale of a business interest), contact me at (703) 397-7490 or [email protected] to review your employment or IC agreement. Over the years, I've been very successful in pushing back on noncompetes for my clients, making them as limited and as narrowly tailored as possible. It would now be my great pleasure to assist you in the removal and voidance of your noncompete, giving you the peace of mind to pursue whatever career path you choose, without restriction.
And even if you do fall under the "senior executive" or business sale exceptions to the ban (i.e., your noncompete stands), there is still hope. See my article on the unenforceability of noncompetes that are overbroad in duration, scope, or reach here ("Noncompetes May Be on the Way Out" by Jack Grimes, May 2023). After you read this article, contact me so I can review your noncompete for enforceability.
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The author is GuideOn Legal Services (GLS) founder Jack Grimes, a military veteran, former Intelligence Community executive, small business owner, and JAG Corps Reserve Officer with over 20 years of experience. He is among a limited number of attorneys in the country with both an LL.M. (Master of Laws) and first-hand experience running small and large businesses. GLS also provides estate planning services through its Live Long, End Strong® full life-cycle approach. It starts with the end in mind, and then builds a lifetime and legacy plan, culminating in the peace of mind that comes with protecting your family's future by preserving assets from taxes, probate costs, legal issues, and unnecessary financial risk.