Client Alert
By Attorneys David W. McGrath and Jennifer S. Moeckel
May 3, 2024
The Federal Trade Commission (FTC) recently announced a final rule banning some non-compete agreements. If the rule is not stopped by the courts, it will go into effect 120 days after it is officially published, which is expected to occur on May 7, 2024. Readers might remember that in January, 2023, when the FTC issued the proposed rule which preceded this final rule, Sheehan wrote a client alert which is available here.
What do New Hampshire businesses need to know about the final rule? Although it is called a final rule, the situation is by no means final. There are serious challenges to the rule underway and ahead. One or more of these court actions may enjoin (stop) the rule from taking effect temporarily or permanently. These lawsuits allege that the FTC does not have the authority to enact a rule banning non-competes. The argument is that non-competes present questions of major political or economic significance which are under the jurisdiction of Congress, not governmental agencies. It will take time for these challenges to work their way through the courts, and we will continue to monitor them closely.
If the rule does go into effect, how will it impact your business? The rule will apply to for-profit businesses of all sizes. The rule will prohibit these businesses from entering into or using non-compete agreements with most workers after the rule goes into effect which, if the rule is published on May 7 as scheduled and is not stopped by the courts from becoming effective, will be September 4, 2024. The rule will apply to contracts entered before or after that effective date, except in the case of certain high-level executives (defined below) whose contracts entered into before the effective date are exempted.
The rule will prevent non-competes, which the FTC defines to mean post-employment restrictions that prevent a worker from becoming employed by a competitor or that penalize the worker for doing so. Notably, the rule will not apply to:
- non-disclosure, customer non-solicitation, or employee no-hire restrictions, unless those restrictions are so overreaching that they have the effect of preventing the former employee from working for a competitor in the same field;
- non-compete restrictions arising out of the sale of a business;
- existing employment agreements predating the rule’s effective date that prevent executive-level employees (employees earning more than $151,164 annually who serve in policy making positions) from working for a competitor. The rule will invalidate non-competes with executives entered into after the effective date of the rule; and
- claims of breach of a non-compete agreement that arise before the rule becomes effective.
What is the practical effect on New Hampshire employers? Contractual restrictions that prevent former employees from working for competitors are already rarely enforced by New Hampshire courts, so if the rule takes effect, the change won’t be dramatic in most circumstances. However, situations involving high level executives could be impacted. Currently, the situations in which blanket non-competes are most likely to be enforced in New Hampshire involve high level, executive employees. If the FTC rule takes effect, it would prohibit blanket non-competes with certain executive employees that New Hampshire courts might otherwise enforce. So, if the FTC rule withstands the legal challenges ahead (don’t bet on it), there would then be a collision between the federal FTC rule and New Hampshire law. In that situation, the federal rule would prevail. Note that the practical effect of the FTC rule on employers in other states will depend on those states’ particular non-compete laws.
What should businesses do while waiting for the outcome of the court challenges? To prepare to comply if the rule does become effective, New Hampshire employers should identify all current employees subject to non-competes and all former employees subject to non-competes that are still within the period of restriction. For example, if the business has historically used a non-compete period of one year, identify all the employees who departed in the last year who were subject to a non-compete. It would also be wise to determine which of these current and former employees are/were executive level employees, as noted above. Having this information compiled will help employers and their legal counsel prepare to send notices to those employees the rule requires be informed that their non-competes are unenforceable.
In addition, New Hampshire employers should regularly review the restrictive covenant agreements they are currently using for all employees to ensure they comply not only with the FTC rule but also current New Hampshire legal precedent.
Employers may also wish to learn more about the rule by watching a free webinar the FTC is presenting on May 14. More information and a registration link for the webinar are available here. New Hampshire businesses may also want to consult with their legal counsel about how best to satisfy the FTC rule and New Hampshire law.
What’s next? Time will tell. Until then, we’ll be watching – and reporting. In the meantime, feel free to reach out with any questions. We are here to help.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice.
Attorneys David W. McGrath and Jennifer S. Moeckel are members of Sheehan Phinney’s Labor and Employment Group.