Understanding the FTC’s Noncompete Rule

By April 25, 2024 News

At the forefront of protecting workers’ rights and fostering fair competition, the Federal Trade Commission (FTC) recently implemented a groundbreaking Noncompete Rule. This rule, finalized on April 23, 2024, while supposing to safeguard American workers against the effects of noncompete agreements presents substantial new hurdles when it comes to protecting intellectual property. The unintended consequences of the new rule are yet to be fully understood.

Key Provisions of the FTC’s Noncompete Rule
The FTC’s Noncompete Rule prohibits employers from enforcing noncompetes against most workers. Here are the key provisions of the rule:

  •  Ban on New Noncompetes: Employers are prohibited from entering into new noncompete agreements with workers as of the effective date of the rule. This restriction ensures that workers are not unfairly bound by restrictive contracts when seeking employment opportunities.
  • Limitations on Enforcing Existing Noncompetes: Existing noncompete agreements can only be enforced against senior executives, defined as workers earning more than $151,164 in a “policy-making position.”
  • Notification Requirement: Employers must inform workers whose noncompetes are no longer enforceable that their agreements will not be upheld. The FTC provides model language to facilitate this notification process, ensuring transparency and compliance.
  • Exception for Business Sales: Noncompete agreements between the seller and buyer of a business are exempt from the rule, allowing for continuity in business transitions.

Impacts on Trade Secrets
While the proposed rule does not explicitly change the law of trade secrets, the practical impact is substantial. Thus, although Federal and State Trade Secret laws still exist and provide some protection, proving and maintaining the trade secret may become unworkable. Noncompetes have typically been a critical component in a company’s trade secret strategy and ensuring that employees cannot unfairly use, and commercially exploit, trade secrets against the company. For example, employees with trade secret knowledge cannot, even should they wish to, avoid using trade secret information when performing the same job for a direct competitor. Such a situation may lead companies to segment and compartmentalize trade secret information among different employees, resulting in inefficiency and ultimately advancement of such employees.

Impacts on Confidential Technical and Business Information
Not only does the new rule potentially devastate trade secret protection, but it also may substantially impact a company’s ability to control its confidential technical and business information. Such information may have substantial value but yet it may not rise to the level of a trade secret. As such, noncompetes in cooperating with confidentiality agreements are sometimes the only tools available to retain some protection against unfair competition by competitors who hire employees only to obtain the information.

The new rule will have far reaching affects on intellectual property, including trade secrets. With noncompete agreements becoming largely unenforceable, companies may need to rethink the overall IP strategy. McCoy Russell has experience across the range of IP protections available and is ready to assist in this regard. Please contact us at [email protected] if you think we can be of assistance.