The Federal Trade Commission’s expected final rule regarding covenants not to compete has now been issued, prompting many Ray Quinney and Nebeker clients to ask what’s next? The first thing to recognize is that FTC’s new rule is not yet in effect. It won’t become effective until 120 days after the date the final rule is published in the Federal Register. We expect that rule to be published any day now, meaning the effective date will arrive at the beginning of September, 2024. But no time like the present for Utah employers to consider how to manage covenants not to compete.
Importantly, the FTC’s new rule has already been challenged in several lawsuits, including one filed by the Chamber of Commerce of the United States of America. Given that the FTC rule is not in effect, and is already under scrutiny in the courts, Utah employers are not yet required to change their covenant not to compete portfolio. But businesses may want to consider the following:
- Review your existing non-competes to distinguish between agreements binding “workers” versus non-competes binding “senior executives.” Under the rule, there is an exception for a “senior executive,” defined as a person, typically a company officer such as a president, earning more than $151,164 annually with “policy-making authority.” 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.” (As so defined, the FTC estimates that senior executives represent only 0.75% of all workers.) If an individual is a “senior executive,” then a noncompete in place before the effective date can still be enforced. But the FTC clearly believes senior executives are the exception, not the rule. Thus, after (and if) the rule goes into effect, all non-competes, including those for senior executives, executed after the effective date would be void.
- Non-senior executives, or “workers,” would be bound by the new rule, if it goes into effect. The rule bans any noncompete clause for a worker, independent contractor, or another non-employee worker. “Workers” is defined very broadly, essentially including anyone regardless of legal status who provides services to someone else.
- If the rule goes into effect, employers must notify all workers subject to a non-compete and advise them that the non-compete clause is no longer valid as of the effective date. The FTC provided model language for the notification, but Ray Quinney and Nebeker can also assist in crafting appropriate language regarding the notice, if it becomes necessary. In connection with this notice, it may be appropriate to advise employees of other legal obligations they need to comply with. For example, controlling trade secret law, meeting their duty of loyalty to their employer, and abiding by appropriate confidentiality agreements protecting company information about technology, business practices and customers.
- The FTC rule would only ban non-competes. Other agreements, such as carefully drafted confidentiality and employee- and customer-non-solicit agreements can be construed as enforceable even under the FTC’s new rule. This interim period, before the FTC rule goes into effect, is an excellent time to review your existing agreements so that companies may ensure they have contractual protections in place that comply with the new FTC rule, if it goes into effect. Ray Quinney and Nebeker can assist clients with an audit of their current employee agreements.
There are a few exceptions to the FTC’s new rule. The FTC says that some employers are outside the FTC’s jurisdiction and therefore not subject to the rule. This includes banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits. In addition, the rule does not impact certain non-competes in connection with the sale of a business.
If you have questions, please contact Liesel Stevens or Rob Rice.