On January 5, 2023, the Federal Trade Commission (FTC)—which protects consumers from anti-competitive, deceptive, and unfair business practices—proposed a rule to prohibit employers from imposing non-compete clauses on workers. After almost a year of public comment, on April 23, 2024, the FTC released its final rule banning the use of non-compete agreements, under most circumstances, nationwide. This is a sea change in the law as it relates to non-compete agreements, which has historically been governed by state law with the enforceability of post-employment restrictive covenants hinging on the unique laws of each jurisdiction. While a uniform law with respect to non-compete agreements will alleviate the need for an employer operating in multiple jurisdictions to have multiple non-compete agreements to comply with each state’s law, the FTC’s final rule appears to be another example of a federal agency meddling with state law and as a consequence, employers’ policies and procedures.
The FTC’s final rule bans employers from entering into non-compete clauses with their workers and independent contractors. While true non-compete agreements have been unenforceable in Oklahoma for years (other than in the sale of the goodwill of a business or the dissolution of a partnership), the alarming part of the final rule is how broadly “non-compete clause” is defined, calling into question if it also applies to other restrictive covenants such as non-solicitation agreements and non-disclosure agreements that are allowed for under Oklahoma law. For example, if a non-solicitation provision is viewed as infringing on a former worker’s ability to obtain other employment, it could arguably fall within the FTC’s overly broad definition of “non-compete” clause. Such a scenario could jeopardize the continued use of non-solicitation agreements in Oklahoma, and drastically impact employers’ current policies, procedures and practices.
The final rule does have a few limited exceptions to it. First, the final rule does not apply to non-compete agreements entered into as part of the sale of a business. Second, the final rule does not apply to a claim for breach of a non-compete agreement that has accrued prior to the final rule taking effect. Third, the final rule does not apply to non-compete agreements entered into with “senior executives,” who are in a “policy-making position” and make more than $151,164 on an annual basis, prior to the effective date of the final rule—although once the final rule takes effect it will also ban non-compete agreements with “senior executives” on a go-forward basis. The final rule is retroactive and an employer who has entered into a non-compete agreement with a worker must notify each worker in writing that the non-compete provisions in the agreement are unenforceable. The FTC also requires that in the written the employer identifies the person who entered into the non-compete agreement with the specific worker, and the notice must be sent via hand delivery, mail, email or text message.
The FTC’s nationwide expansion of the ban on non-compete agreements also raises significant concerns around trade secret misappropriation. Companies should review existing agreements and draft new non-disclosure and non-solicitation agreements to provide protection against theft and disclosure of trade secrets. In addition, companies can audit and provide strategies aimed at reducing the chance of trade secret misappropriation through employment policies, written agreements, and acknowledgments regarding the confidentiality of confidential and proprietary information. Companies should implement procedures to monitor and govern access to trade secrets, restrict the use of personal devices for company business, and, where possible, obtain contractual agreements from departing employees to return all confidential and trade secret information to the company upon termination. Agreements with employees should contain appropriate assignment and work-made-for-hire language to ensure the company’s ownership of worker-developed intellectual property. Companies should also prepare for the need to initiate more trade secrets litigation to protect their confidential information and trade secrets.
The final rule will become effective 120 days after it is published in the Federal Register with an effective date likely in September 2024. Before then, the final rule is also subject to review by the President and Congress and is already the subject of several legal challenges in the courts. The principal legal challenge to the enforceability of the final rule is whether the FTC has the power to issue such a rule and whether it implicates issues of federalism, or violates the Supreme Court’s recent hyper-focus on the “Major Questions” doctrine, which places limitations on the ability of federal regulatory bodies to enact rules that are outside of their congressional mandate. In the meantime, employers should begin identifying restrictive covenant agreements they have in place with current and former employees to determine if those agreements fall within the scope of the FTC’s final rule. Employers should also review their current restrictive covenant agreements to ensure they are narrowly tailored to protect the legitimate business interests of their respective company. Crowe & Dunlevy will continue to monitor the legal challenges to the final rule and keep you informed on any developments.
If you have any questions regarding the FTC’s Final Rule on non-compete agreements, please contact Allen L. Hutson, Shawn M. Dellegar, or a member of the firm’s Labor & Employment or Intellectual Property Practice Group.