FTC Ban On Non-Compete Clauses To Take Effect On September 4
On September 4, 2024 - absent intervening litigation - the Federal Trade Commission’s (FTC’s) ban on non-compete clauses will become effective. The FTC’s ban will have a significant impact on how all businesses, including federal government contractors, manage their employment relationships and related risks. Indeed, as explained below, government contractors should be prepared to issue notices related to the ban that are required by the FTC to be issued once the ban becomes effective.
Summary of the Ban
The FTC’s ban on non-compete clauses was issued under a Final Rule that the FTC published on May 7, 2024. More specifically, that Final Rule implements FTC regulations that state that it is an unfair method of competition for employers to enter into, or enforce, a non-compete clause or to represent that a worker is subject to a non-compete clause. However, the final rule carves out existing non-compete clauses with respect to senior executives. Although companies are prohibited from entering into or enforcing new non-compete clauses, for senior executives, existing non-compete clauses can continue to be enforced in the future.
As for existing non-compete clauses with personnel who are not senior executives, the new FTC regulations require companies to provide workers with a clear notice by the effective date of the regulations - September 4, 2024 - informing them that the non-compete clauses will not, and cannot legally, be enforced against them. The regulations provide model language that businesses can use in their forms.
The FTC regulation defines a non-compete clause to mean any term or condition (including in a contract or a workplace policy) that
- prohibits a worker from
- penalizes a worker for, or
- functions to prevent a worker from
seeking or accepting work in the U.S. from a different business or person after employment concludes, or operating a business in the U.S. after employment concludes.
Implications for Technology Companies
In the preamble to the Final Rule and in response to public comments raising concerns about the ban, the FTC takes the position that non-disclosure agreements, trade secret law and patents are sufficient to protect businesses against the risks that arise when workers leave to join direct competitors. Businesses, therefore, are now faced with the seemingly impossible task of somehow tracking where former employees with access to sensitive information go in the hopes of nipping potential infringements by competitors in the bud.
Ignored completely is the notion that often for many technology innovators, particularly small businesses, their competitive edge in early stages of development derives from simply knowing that an undiscovered solution exists or an innovation is even possible. A small technology company once hoping to stake out its place in a niche market will find little comfort in the knowledge that, upon hiring one of its a former employees, a large competitor with vastly superior marketing and manufacturing resources found a different way to skin the cat.
Government Contractor Letters of Commitments
Moreover, it is not entirely clear how the ban applies in the context of a federal government contractor that is required by an agency to provide key personnel commitment letters as a condition of a contract award. Indeed, the FTC was given a chance at an explanation when a commenter to the proposed rule argued that the ban implicated the ability of federal contractors to provide those commitment letters to government agencies. Unfortunately, however, the FTC seemingly did not think it worth spending much time on the issue, brushing away the concerns with a curt, if not perplexing, response: contractors have alternatives to non-compete clauses to retain key personnel including using fixed-term contracts or providing key personnel with “a better job than competitors.”
The FTC's response to the comment fails to address whether letters of commitment that agencies require key employees to sign constitute non-compete clauses. It would seem they do not because commitment letters are largely aspirational and typically do not in, and of themselves, prevent employees from quitting or impose any penalties on workers who leave their companies after signing them. More to the point, in the case of a company that wishes to remain an at-will employer and to not sign employees to contracts for a definite term, it remains unclear how merely offering a key employee “a better job than competitors” - whatever that means - would provide assurance enough to either the contractor or to the government agency that a key employee who is the subject of a commitment letter will actually be incentivized to stay put.
Nevertheless, as the September 4 effective date approaches, government contractors should stay alert to any new developments and should be prepared to issue required notices to personnel currently working under non-compete clauses.
