The FTC Bans Noncompetes for Employees by Ted Storer

Employers use different restrictive covenants to protect their proprietary information and competitive status in their industries.  Restrictive covenants are often identified as confidentiality or nondisclosure agreements (NDA’s), trade secret provisions, nonsolicitation agreements, nonpiracy provisions, and noncompete agreements.  Noncompete provisions contractually outline certain activities that past employees may not engage in.  In Indiana, those noncompete provisions had to be narrowly drawn to protect the legitimate business interests of the employer and not unfairly restrict an employee in terms of the scope of the duration, the nature of the protection and the geographic range.  However, this type of restrictive covenant will soon be improper.

The Federal Trade Commission issued a Final Rule on April 23, 2024, that effectively bars noncompete agreements for employees.  A noncompete is defined as a term or condition of employment that prohibits a worker from seeking or accepting work or operating a business after the conclusion of employment in the United States.  It is an unfair method of competition to enter into a noncompete agreement, to enforce a noncompete clause or to represent to a worker that he or she is subject to a noncompete. 

The new rule does not appear to bar other types of restrictive covenants.  Employers may still use NDA’s and trade secret confidentiality agreements.  It also appears that nonsolicitation and nonpiracy provisions are enforceable. 

Noncompetes remain enforceable as part of a bona fide sale of a business entity.  In other words, if a worker, who is also the owner of a company, sells his or her ownership, the sale documents can still include a noncompete. 

So, what happens to existing noncompetes?  For most employees, the regulation requires the employer to notify employees in writing, in a clear and conspicuous notice that the existing non-compete is an unfair method of competition and will not be, and cannot legally be, enforced against a work.  The FTC has provided a form of notice in its rule. 

There are some exceptions.  An existing lawsuit to enforce a noncompete can continue.  Certain highly paid executives with existing noncompetes are still bound.  Those employees must be an officer and have policy making authority, and they must be paid more than $151,164 on an annual basis, including all bonuses. 

This new rule will not be effective until 120 days pass from its official publication – which should occur any day now.  So, employers have time to examine their contracts.  Employers can revise their agreements to remove the noncompete provisions and to tighten up any other restrictive covenants.  Employers need to prepare themselves to provide the required notice to workers.  Employers need to determine whether existing policy makers are still bound by their existing agreements.