FTC Final Rule Banning Noncompetes: Key Points

MEMORANDUM

TO: Private Employer Clients

FROM: Jensen Baird

RE: Noncompetition Agreements and New Federal Trade Commission (FTC) Final Rule

DATE June 11, 2024

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule to ban noncompetition agreements throughout the country.  This memorandum provides a summary of current Maine law governing noncompetes, and highlights key points regarding the FTC Final Rule prohibiting the use of almost all noncompete clauses.  Note that the FTC Final Rule is intended to preempt state law governing noncompetes only to the extent that state law is in conflict with the FTC Final Rule, and is slated to take effect on September 4, 2024 (unless delayed in the event that injunctive relief is provided in pending litigation).

FYI – BACKGROUND ON MAINE LAW

In Maine, noncompetes are generally considered to be contrary to public policy, and enforceable only to the extent that they are reasonable and no broader than necessary to protect legitimate business interests.  Legitimate business interests are trade secrets, confidential information that does not qualify as a trade secret, or the employer’s good will. If the employer can adequately protect its business interest through an alternative restrictive covenant such as a nonsolicitation agreement or nondisclosure agreement, it must do so.  Title 26 M.R.S. § 599-A outlines statutory restrictions and requirements (discussed below), which apply to all noncompetes entered into or renewed after September 18, 2019.

Current Employer Considerations (Statutory Restrictions and Requirements):

  • Disclosure Requirement:  Employers are required to provide a statement that a noncompete agreement is required for a given position prior to making an offer of employment. 
  • Notice Requirement:  Employers are required to provide a copy of a noncompete agreement at least three days prior to requiring the employee to sign the agreement.  The notice requirement is designed to allow either an employee or prospective employee to review and negotiate the terms of the agreement. 
  • Prohibition for Certain Workers:  Certain workers cannot be required or permitted to enter into a noncompete agreement with an employer; this includes employees who earn wages at or below 400% of the federal poverty and, as of 2023, properly-licensed veterinarians employed in a veterinary facility in which the veterinarian does not have an ownership interest.
  • Penalties: An employer who violates any of the provisions related to disclosure, notice, or the prohibition for certain workers, is subject to civil violation and associated penalties of at least $5,000. 
  • Effective Date:  Under Maine law, noncompete provisions have a delayed effect, which is either one year from the date of an employee’s employment, or six months after an employment agreement is signed, whichever is later.  This delayed effect does not, however, apply to allopathic physicians or osteopathic physicians.

FEDERAL TRADE COMMISSION (FTC) FINAL RULE

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule to ban noncompetes throughout the country.  The FTC Final Rule is intended to preempt state law governing noncompetes only to the extent that state law is in conflict with the FTC Final Rule and is slated to take effect 120 days after publication in the Federal Register (which is anticipated to be on September 4, 2024, and potentially subject to delay in the event that injunctive relief is provided in pending litigation). Upon its effective date, the FTC Final Rule will invalidate existing noncompetes, and require that employers provide notice to workers bound by an existing noncompete that they cannot enforce the noncompete against them.  Further, the FTC Final Rule appears to be intended to cover both noncompete provisions, as well as contractual provisions that have the effect of prohibiting a worker from seeking or accepting employment; this could potentially implicate non-solicitation provisions. 

Notice Requirement:

Pursuant to the FTC Final Rule, by September 4, 2024, employers are required to provide clear and conspicuous notice to workers (current and former, as applicable) that noncompete provisions will not be, and cannot legally be, enforced against the worker.  Notice may be communicated by hand delivery, via mail, e-mail, or text message.  The FTC Final Rule exempts employers from the notice requirement where the employer has no record of a street address, e-mail address, or mobile telephone number for the worker.

Exceptions:

  • Senior Executives:  The FTC Final Rule includes an exception for senior executives, defined as workers in policy-making positions who earn $151,164 or more, specifically providing that existing noncompetes for senior executives may remain in effect.  Note, however, that employers may not enter into or enforce new noncompete agreements with senior executives following the effective date of the FTC Final Rule.
  • Exception for Persons Selling a Business Entity:  An additional exception exists for noncompetes between a buyer and seller of a business.  The FTC Final Rule provides that, in order to fall within the exemption, the noncompete must be entered into pursuant to a bona fide sale.  Further, the restricted party in the noncompete is defined as a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or selling all or substantially all of a business entity’s operating assets.
  • Exception for Existing Causes of Action:  While the FTC Final Rule is intended to be retroactive, an exception exists to the extent that there is a cause of action related to a noncompete provision accrued prior to the effective date of the FTC Final Rule.
  • Good Faith Exception:   The FTC Final Rule provides that “[i]t is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that [The FTC Final Rule] is inapplicable.”

NEXT STEPS

Employers should be mindful of the FTC Final Rule, and specifically its notice requirement by the effective date.  At least three lawsuits have been filed to date challenging the FTC’s authority to promulgate this rule.  It remains to be seen how those cases will proceed. While it is possible that the effective date of the FTC Final Rule may be delayed, employers should prepare for the FTC Final Rule to go into effect as adopted until further notice.  We will continue to monitor this matter as it evolves.  If you have any questions, please feel free to contact Alyssa Tibbetts or Paige Eggleston at (207) 775-7271 or atibbetts@jensenbaird.com / peggleston@jensenbaird.com.