On April 23, 2024, the Federal Trade Commission (“FTC”) announced a nationwide ban on non-competition agreements (the “Rule”). Although legal challenges are anticipated, as of now, the Rule is set to take effect 120 days after its official publication. Any state laws that are contrary to the terms of the Rule would be preempted[1], including Louisiana’s La. R.S. § 23:921, which provides the current statutory framework for non-competition agreements in Louisiana. 

What does the Rule provide?

The Rule is found in chapter I, title 16, subchapter J of the Code of Federal Regulations and consists of §§ 910 - 915. The Rule provides that it shall be an unfair method of competition to enter into a non-compete clause with any worker (including senior executives) after the effective date of the rule.[2] It will also be an unfair method of competition to enforce or attempt to enforce a non-compete clause or to represent to any worker that he or she is subject to a non-compete clause.[3] There are exceptions to the general rule when: 1) the non-compete agreement is included as part of a “bona fide sale of a business”; 2) when the offending conduct stems from activities that occurred prior to the effective date of the Rule; or, when the party seeking to enforce the non-compete clause – or making representations about the non-compete clause – is acting under a good faith belief that the Rule is inapplicable.[4]

What happens with existing agreements?

Existing agreements (except for those entered with senior executives) are retroactively barred under the Rule.[5] Any person who has entered into a non-competition prior to the effective date of the Rule is required to provide notice to their worker(s) that the agreement is no longer valid.[6] This notice must me “clear and conspicuous” and must be provided by the effective date of the Rule.[7] The Rule provides specific form requirements for the notice.[8] It also provides a form letter that the FTC has preemptively determined will comply with the notice requirements.[9] 

There is one exception; however, to the retroactive nature of the Rule. “Senior executives” who signed a valid and enforceable agreement prior to the effective date of the Rule will still be bound by the terms of their agreement.[10] “Senior executive” is defined as a worker who was in a policy-making position and who received total annual compensation of at least $151,164 in compensation in the prior year related to that position.[11] The FTC estimates that less than 1% of all workers in the United States would meet the definition of senior executives under the Rule. 

How can businesses protect their interest going forward in light of the Rule?  

For business owners, the new Rule will bring about new challenges. Specifically, how can a business protect its most important asset – like its trade secrets and clients – from being poached by former employees?

Luckily, there are some solutions. The Rule, for example, does not appear to have any impact on non-solicitation agreements, which in Louisiana are also governed by La. R.S. § 23:921. When drafted appropriately, a non-solicitation agreement can enjoin current and/or former employees from reaching out to clients (which may include former, current, and perhaps even prospective clients), in an attempt to garner their business. Non-solicitation agreements in Louisiana are generally subject to the same restrictions as non-compete agreements. They have to be carefully drafted to ensure statutory compliance, otherwise they will not be enforceable.

Additionally, the Rule does not implicate current confidentiality and trade secret clauses. Jurisprudence has repeatedly found that client lists in particular can constitute confidential information and/or trade secrets, when proper precautions are taken to ensure their private nature. Non-solicitation agreements, confidentiality agreements, and trade secret provisions all carry with them certain advantages and challenges, but when used properly, they may be able to offer a business certain protections that are otherwise unavailable based on the new FTC Rule.     

[1] §910.4; [2] §910.2(a)(i); [3] §910.2(a)(ii-iii); [4] §910.3; [5] §910.2(a)(ii-iii); [6] §910; [7] §910.2; [8] §910.2(b)(2); [9] §910.2(b)(4); [10] §910.2(a)(2); [11] §910.1