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Ban on non-competes in the US

24 April 2024

The US Federal Trade Commission (FTC) has this week voted in favour of implementing an almost complete ban on employee non-compete obligations, having threatened to do so for a number of years and having been supported by President Biden.

Are non-competes not already banned in parts of the US?

While a prohibition on the use of non-competes is nothing new in parts of the US - California has banned them for the past 150 years - any decisions in this regard had previously been taken at a state level. This new ban will be implemented at a federal level, meaning that it will apply across the country and will override any inconsistent state laws.

How will the rule affect businesses?

Any business engaging workers (including employees and independent contractors) will be forbidden from including “functional” non-competes in those individuals’ contracts. That means that even where a clause may not be viewed as being a pure restriction on competing (for example, a client non-dealing obligation), if its effect is deemed to prevent the individual competing, it will also fall foul of the new rule.

What about employees who are subject to existing non-compete obligations?

Employers will be required to notify any individuals who are currently subject to a non-compete that the provision will no longer be applicable.

There is one exception in the context of employment: where an individual currently earns more than approximately $150,000 a year, any existing non-competes will remain enforceable. Nevertheless, businesses will not be allowed to enter into any new arrangements which include non-competes, even for individuals of this seniority.

It is worth noting that if an employee breaches an existing non-compete prior to the ban coming into effect, the business will still have the right to take appropriate legal action.

What happens next?

The ban should, technically, come into force 120 days after the FTC publishes the details on the “Federal Register”. It is expected to do so shortly, and businesses should therefore prepare to comply by that deadline.

However, the FTC’s decision is likely to be the subject of legal challenges on various bases, including that the FTC may lack the legal authority to have imposed the ban. Indeed, one such challenge was filed in Texas almost immediately following the announcement of the decision. It will therefore be open to the Courts to delay the implementation of the ban or, perhaps, to overturn it altogether.

If the ban does take effect, what options will employers have?

Provided they do not have the “effect” of a non-compete obligation, other types of employee restrictive covenants (such as client non-dealing and solicitation provisions) will remain acceptable.

Further, and importantly, provided they are structured appropriately, it is likely - though not yet guaranteed - that “garden leave” clauses will remain permissible, meaning that employers will be likely to retain the opportunity where necessary to keep an employee out of the market for a period of time, albeit prior to rather than following the termination of their employment.

The scope of the rule will become clearer once the FTC publishes further details, and so watch this space. As to the UK, the government’s position remains that non-competes will be limited to a 3-month post employment period (there is currently no such cap in place). Although it remains unlikely that there will be sufficient parliamentary time before the next election to introduce any such change, the development in the US may provide a renewed impetus.

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