The FTC’s new rule banning non-compete clauses will take effect on September 4th and impact all workers, including contractors and interns. Weintraub attorneys Jacqueline Simonovich and Shauna Correia discuss the pending legal challenges and how the outcome could reach the Supreme Court in the latest installment of California Employment News.

Watch this episode on the Weintraub YouTube channel and listen to this podcast episode here.

Jackie Hi, I’m Jackie Simonovich, an attorney at Weintraub Tobin, and I’m joined today by my colleague, Shauna Correia. Today, we’re discussing the latest on the FTC Non-Competent Rule. The Federal Trade Commission published its final rule on May 7th, which is slated to go into effect September 4th, pending the outcome of a few legal challenges that we’ll talk about later. Shauna, can you give Can you give us some background on the FTC final rule?  

Shauna Sure. California employers are already familiar with state laws prohibiting post-implement non-competition clauses in employment contracts, but even California employers should pay attention because this new rule, if it goes into effect, is broader. First, the rule will prohibit employers from imposing non-competes on all workers, and that is including not just employees, but other workers like independent contractors, interns and volunteers, whether paid or unpaid. And under the rule as defined by the FTC, any type of provision that would function to prevent or penalize or prohibit a worker from seeking an employment or working after leaving the relationship with the current company would be banned. And unlike in California, there’s no carve out specifically for protection of trade secrets. The agency’s rationale for this is that other state and federal laws exist to protect trade secrets and will continue to be enforceable. Jackie, do you want to cover the two exceptions that there are to the new FTC rule?  

Jackie Sure. Existing non-competes with senior executives can remain enforced, but the term senior executive is defined narrowly. It’s a worker who earns, and this is a very exact number, more than $151,164 and is in a policy-making position. The FTC estimates this to be less than 1% of all workers, and the rule would still prohibit new non-competes with senior executives moving forward. The second exception is non-competes in connection with a worker’s sale of a business interest. Although the rule covers most employers, there are also some employers who will not be covered, and those are employers who are exempt from the FTC’s jurisdiction. Those are financial institutions, some nonprofits, and air carriers. Now, because the FTC rule is federal, it will supersede all contrary state laws. And Shauna, how does this affect California employers?  

Shauna Well, so typically federal law provides the floor, and then California comes in with laws that are more protective and more stringent, and that’s what states are permitted to do. That’s pretty typical. But in this case, California law already exists, but the FTC rule is coming in, and in some ways, it’s even more restrictive than state law because it applies, as we talked about, to workers other than employees, for example. So people who are in California are going to be required to comply with both the federal and state law. So for example, in California, the exception for sale of a business is not as broad as the FTC rule, but because it’s more restrictive, the sale of a business exceptions in California will still be subject to those same limitations that already exist. Another note is that in California, there is no exception for senior executive non-competes. So nothing would change with respect to already unlawful or unenforceable non-competes. They’d still be unenforceable even for senior executives because they were unenforceable before the FTC rule came into effect. One difference is, again, that the FTC rule has no express carve out for protection of trade secret information.  Because the FTC’s definition of a non-competent clause is very broad, there’s a concern for California employers who are currently relying on contract provisions, for example, protection of confidentiality of information, customer non-solicitation clauses as a contractual means of protecting their trade secrets, including customer lists, they may need to evaluate and reevaluate those provisions. Employers, even in California, are encouraged to talk with their employment attorneys to make sure existing NDAs, confidentiality provisions, and those sorts of provisions are sufficiently narrowly drawn to restrict just the unauthorized use and disclosure of trade secrets without running afoul of the FTC’s ban. Jackie, you mentioned at the outset that there are some legal challenges pending. Can you talk a little bit about the cases working their way through the federal courts?  

Jackie Several lawsuits were brought to challenge the FTC role, two in Texas, one in Pennsylvania, and one in Florida. In the Texas case, the court granted the plaintiff’s preliminary injunction, which stays enforcement of the rule, but only as to the plaintiffs in that case. The court has said that it will rule on the merits of the case by the end of August, and that ruling is expected to result in a nationwide injunction of the FTC role. That will apply to businesses beyond the plaintiffs in that case. In the Pennsylvania case, the court issued a rather surprising ruling on July 23rd. It declined to issue the plaintiff’s preliminary injunction, and it also stated that the plaintiffs were unlikely to prevail on the merits of the case because it said that the FTC did have the power to promulgate the non-competent ban. Right now, the FTC rule is set to go into effect in less than a month on September 4th, but we’re still awaiting the decisions from the Texas Court and from the other cases I mentioned. We’re also seeing a circuit split, so this issue could likely be decided by the Supreme Court.  

Shauna: Thanks, Jackie. I think we should expect to see both cases go up on appeal to the third and fifth circuit courts. But for now, we’ll just watch and wait for the Texas Court to issue its decision later this month. That’s all the time we have for right now, ut if you subscribe to Alerts for “California Employment News,” you’ll be first to know about updates on this and other hot employment law topics. You can also check out our blog at www.thelelawblog.com. Thanks.   Social The FTC’s new rule banning non-compete clauses will take effect on September 4th and impact all workers, including contractors and interns. Weintraub attorneys Jackie Simonovich and Shauna Correia discuss the pending legal challenges and how the outcome could reach the Supreme Court in the latest installment of California Employment News.