Federal Trade Commission Bans Non-Compete Agreements Nationwide
In January of 2023, the Federal Trade Commission (FTC) proposed a new rule banning non-compete agreements nationwide. After a year of extensive commentary from the public, The FTC issued its final rule on January 23, 2024. [1] This new rule essentially bans all arrangements between an employer and employee that limit the employee’s work opportunities following their departure. [2] For years, Washington employers were able to utilize such agreements to the extent that they were voluntary and reasonable. [3] Now these arrangements, with very few exceptions [4], are considered unfair methods of competition subject to severe monetary penalties. [5]
In its commentary on the new rule, the FTC stated its purpose was to “promote competition,” yet most Washington employers who use non-competes do so to maintain their competitive edge. While the new rule does not prevent employers from utilizing confidentiality agreements to protect their valuable information from abuse by departing employees, the line between permissible protections and unfair methods of competition may not be entirely clear. This is because the new rule defines prohibited non-compete clauses so broadly:
Non-compete clause means:
(1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
(i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
(ii) operating a business in the United States after the conclusion of the employment that includes the term or condition. [6]
Employers will need to take a hard look at their policies to ensure that they do not function to prevent departing employees from obtaining new work opportunities.
In addition to prohibiting further use of non-competes, the new rule also voids existing non-competes. Employers are required to notify employees who were previously subject to a non-compete that the agreement is now unenforceable. These notice requirements place a duty on employers to notify both current and former employees that their non-compete agreements are no longer enforceable. [7]
The FTC’s new rule represents an upheaval in the handling of non-compete agreements in the workplace. It will go into effect 120 days after its publication in the Federal Register. [8] With this new regime looming, it is a good time for Washington employers to revisit their policies to ensure compliance with this new and strict federal standard. An experienced employment law attorney can help you in this process.
[1] https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes
[2] https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf . The full text of the rule is at pgs. 561-568 of this pdf. The rule will ultimately be codified at 16 CFR 910.
[3] RCW 49.62.020
[4] Non-competes entered before the rule’s effective date, with highly compensated, management level employees will be undisturbed. See 16 CFR 910.2(a)(2)(iii). Non-Competes associated with the sale of a business will be permitted. See 16 CFR 910.3
[5] 15 U.S.C. § 45 (The Commission may commence a civil action to recover a civil penalty in a district court of the United States against any person, partnership, or corporation which violates any rule under this subchapter respecting unfair or deceptive acts or practices)
[6] 16 CFR 910.1
[7] 16 CFR 910.2 (the person who entered into the non-compete clause with the worker must provide clear and conspicuous notice to the worker by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.)
[8] 16 CFR 910.6
If you have any further questions, an attorney at Faber Fairchild McCurdy may be able to help.
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