As we posted on Tuesday, the Federal Trade Commission (FTC) has at long last issued its final regulatory rule banning virtually all existing and future U.S. non-compete agreements. In this series, we will unpack some of the more nuanced questions surrounding the final rule.
Does the final rule bar or invalidate non-compete agreements that ban competition while a worker is still employed by a business?
No. The final rule only applies to post-employment competitive activities. And in fact, in many states, employees have common law obligations to not engage in competitive activities during their employment, regardless and separate from any contractual obligations.
Does the final rule apply to so-called “garden leave” agreements?
No. So-called “garden leave” agreements are particularly common in the financial sector. And in welcome news particularly in that sector, the final rule commentary specifies that “an agreement whereby the worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis would not be a non-compete clause under the definition because such an agreement is not a post-employment restriction. Instead, the worker continues to be employed, even though the worker’s job duties or access to colleagues or the workplace may be significantly or entirely curtailed. Furthermore, where a worker does not meet a condition to earn a particular aspect of their expected compensation, like a prerequisite for a bonus, the Commission would still consider the arrangement ‘garden leave’ that is not a non-compete clause under this final rule even if the employer did not pay the bonus or other expected compensation.”
Because of this, “garden leave” agreements may be the best option for businesses that want to stop their workers from competing after their active employment has ended.
What about “garden leave” agreements where the worker is paid a reduced salary during the garden leave period?
The analysis would presumably be no different, though businesses taking this approach should consider that the FTC may, at least depending on the level by which the employee’s salary is reduced, consider this an attempt to evade the final rule.
Does the final rule create a private right of action for workers?
The final rule does not specifically create a private right of action for workers. Rather, the rule, at least on its face, would need to be enforced by the FTC seeking injunctive relief under Section 5 of the FTC Act. That said, litigation involving attempts to create causes of action involving the final rule will undoubtedly ensue should the rule take effect.
Does the final rule apply outside the U.S.?
In the final rule commentary, the FTC makes clear that “the final rule does not apply to non-competes if they restrict only work outside the U.S. or starting a business outside the U.S.”
Some businesses have also asked whether the final rule would apply to (i) foreign workers, including U.S. citizens working abroad, of U.S.-based businesses and/or (ii) U.S.-based workers of foreign businesses. As a preliminary matter, Section 5 of the FTC Act explains that the agency’s jurisdiction extends to businesses, including foreign businesses, where the activities, “have a direct, substantial, and reasonably foreseeable effect” on U.S. commerce. Thus, although not expressly stated, the FTC will likely take the position that the final rule applies to overseas U.S.-based businesses and/or foreign businesses operating in the U.S. by claiming that they have a direct or at least a “reasonably foreseeable effect” on U.S. commerce.
Against that backdrop, as to item (i), the FTC explicitly declined to add language in the final rule stating that it does not apply to overseas employers. The FTC explained that the “final rule may apply to overseas employers if the non-compete purports to restrict work or starting a business in the U.S. and the reviewing court applies U.S. law.” As to item (ii), a foreign business operating in the U.S. is likely subject to the FTC’s jurisdiction and therefore, to the final rule. That said, the final rule does not prohibit foreign businesses, even if operating in the U.S. from restricting a worker’s ability to work or start a business outside of the U.S.
Does the final rule preempt state non-compete laws?
To the extent that such laws conflict with the final rule, yes. However, where state law imposes different or additional, but not conflicting, obligations, then such law likely would not be preempted. For instance, although the final rule permits non-compete agreements entered into with “senior executives” before the rule’s effective date to remain in force, if such an agreement does not comply with applicable state law (e.g., in California, whose law generally bars post-employment restrictive covenants), then it still would not be enforceable (even if it might be under the final rule).