How to Respond to Employee Questions about the FTC’s Noncompete Ban (As a Company that Uses Noncompetes)

On April 23, the Federal Trade Commission (FTC) voted 3-2 to adopt a final rule purporting to ban most employee noncompetes.

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As discussed in our recent alerts, the final rule would bar employers from entering into and enforcing noncompetes with most workers.

ArentFox Schiff’s Trade Secrets, Noncompetes & Employee Mobility Team has been tracking the rule since the FTC’s notice of proposed rulemaking in January 2023. This alert is part of a series of updates addressing the rule and its implications. We will present a live webinar on April 30, with a recording posted online those unable to attend live. Visit our dedicated webpage for forthcoming additional alerts and to view our webinar.

Employers who rely on noncompete agreements to protect their legitimate business interests will no doubt face questions from employees concerning the continued enforceability of those restrictions following the FTC’s promulgated rule and the headlines about the FTC’s new rule in newspapers and online. The AFS Trade Secrets, Noncompetes & Employee Mobility group has compiled the following Q&A talking points for employers to address employee questions:

Employee Question: What is going on with the FTC noncompete ban?

Proposed Response: The FTC has voted to adopt a rule that would prohibit employers from entering into noncompete agreements with most workers. The final rule does not go into effect until 120 days after it is published in the Federal Register, and it is currently being challenged in court. There are significant objections to the FTC’s authority to issue such a sweeping rule. As a result, many expect the rule to be struck down by the courts before it ever becomes effective.

Employee Question: What happens to our existing noncompete agreements? Will the company enforce our noncompete agreements if we leave?

Proposed Response: The FTC’s final rule does not go into effect until 120 days after it is published in the Federal Register. We are aware of multiple court challenges to the FTC’s authority to issue the rule. We are monitoring these challenges. For now, we are not taking any action to rescind or revoke our existing agreements.

The company intends to continue to enforce employee noncompete agreements consistent with established law, unless and until the courts determine that the FTC’s new rule is actually enforceable. 

If the FTC’s new rule survives court challenge, existing noncompetes with most employees will be rescinded when the new rule goes into effect. Existing noncompetes with senior executives, however, will continue to be enforceable. Confidentiality covenants, and customer nonsolicitation covenants, and employee nonsolicitation covenants for all of our employees will remain enforceable, even if the FTC rule ever actually takes effect.

Employee Question: I am reading in the news that noncompetes are harmful to workers and the economy. Why does our company use them?

Proposed Response: Our company’s success is based on our employees’ hard work together as a team for all of us to profit from our collective diligence, innovation, and ingenuity. Noncompetes are one of the ways that we protect this investment in all of our futures from competitors who want to steal what our team has taken years of effort to build. We think it is important that our loyal employees are protected from unfair competition and are able to share in the success of our work together.

Employee Question: I thought noncompetes already were unenforceable?

Proposed Response: The FTC’s rule, if it becomes effective, would be the first federal law ever to put any limits on noncompetes. For more than 100 years, each state has made its own law about noncompetes. Although noncompetes are unenforceable in a few states, almost all states enforce noncompetes as long as they follow reasonable restrictions to ensure the noncompetes are fair. Our company’s agreements comply with all applicable state laws.

Employee Question: Does the FTC’s rule apply to our company as a nonprofit organization?

Proposed Response: The FTC generally does not have jurisdiction over nonprofit organizations so long as the nonprofit satisfies the legal standard for nonprofit status.

In light of the FTC’s rule, as well as the general trend toward more restrictive state laws governing the use and enforceability of noncompetes, employers should evaluate alternative protective measures and utilize a “belt and suspenders” approach to the protection of their interests.

These additional measures may include:

  • Narrowly tailored nondisclosure and nonsolicitation agreements.
  • Robust confidentiality and data security protocols and trade secret protections.
  • Contractual provisions safeguarding proprietary information and client relationships.
  • “Pay to stay” deferred compensation incentives.
  • Fixed-term employment contracts.

Employers also should audit their existing noncompete agreements with senior executives and issue new agreements (to the extent necessary) prior to the conclusion of the 120-day period before the final rule would go into effect if the various court challenges are unsuccessful in blocking the rule from taking effect.

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