On April 23, 2024, the Federal Trade Commission (FTC) enacted a sweeping ban on noncompete clauses. This noncompete ban, much like its state-level predecessors, marks a significant shift in labor policy, aiming to enhance career mobility and wage growth across various industries. This change aims to encourage a more fluid labor market, leading to a more innovative and dynamic economic environment. But what are the effects on businesses– and how can they protect their valuable IP?
Scope and Enforcement of the Noncompete Ban
Starting 120 days after its publication in the Federal Register, the noncompete ban (i) bans all noncompetes moving forward, and (ii) makes it unlawful for employers to enforce existing noncompete clauses except for a narrow exception for “senior executives.”
The act has defined “Senior Executives” as workers earning more than $151,164 who are in a “policy-making position.”
A “policy-making position” is “someone who “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.” (Link to definitions section of rule)
And “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.
Employer responsibilities under the noncompete ban
Employers are required to notify workers that any existing noncompete will not be enforced. The FTC has provided model language to facilitate compliance, the use of which triggers some safe harbor provisions . The model rule states:
“…the model language in the final rule uses the phrase “[EMPLOYER NAME] will not enforce any non-compete clause against you.”852 Because this language does not identify the recipient as having a non-compete, the employer does not need to determine which of its workers have non-competes; instead, it can simply send a mass communication such as a mass email to current and former workers.”
https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf
Section 910.2(b)(2) of the final rule allows for notice by text message, by email, as well as paper notice by hand or by mail to the worker’s last known street address. Employers have 120 days from the date of publication in the Federal Register to provide this notice.
Alternatives to Noncompetes
Obviously, business owners are concerned that without relying on noncompetition agreements, their intellectual property and valuable proprietary information are at risk. Businesses will need to adapt to these changes by finding new ways to protect intellectual property without the relying on the wide breadth of noncompete agreements.
Employers can still protect their business interests, particularly their intellectual property, through other avenues. Typically, noncompetes aim to accomplish goals that are more appropriate for trade secret strategies and non-disclosure agreements (NDAs). Businesses should set up robust trade secret protection and enforcement plans to ensure they can take advantage of state and federal trade secret protection laws.
Additionally, the Commission notably makes a dig at employers by noting that it “encourages employers to focus on improving wages and working conditions to retain talent, rather than restricting their employment opportunities.” While this may seem like a scathing comment, retaining employees does benefit businesses in more ways than one– and we can now add “lack of potential trade secret litigation” to the top of that list.
Final Thoughts
The FTC’s final rule represents a significant shift in how labor competition and employee mobility are managed in the U.S., while also causing warranted concern about the spread of proprietary business information. Several organizations have vowed to challenge the rule and the FTC’s power to pass such sweeping changes. However, moving forward it is critical that businesses become laser-focused on their IP and trade secret protection strategies.
Contact us today for assistance in identifying and protecting proprietary information by utilizing trade secret protection or nondisclosure agreements.
