FTC Ban on Non-Competes

In April 2023, the Federal Trade Commission (FTC) voted to ban non-compete provisions. We’ve received many questions about what this rule—which is NOT in effect yet—means for creative businesses! Here’s a quick explanation. 

The final rule is slated to go into effect 120 days after it’s published in the Federal Register, though a lawsuit could extend that timeline. 

What is a Non-Compete?

A non-compete restricts employees and independent contractors from working for competitors or starting a competing business for a period of time or in a specific geographic region. The new FTC rule will prevent businesses from including non-compete provisions in future agreements and retroactively wipe out most existing provisions.

Do I Have a Non-Compete?

The FTC estimates that 18% of all workers, or 30 million Americans, have non-compete provisions in their employment contracts.

Employers: We rarely see non-compete provisions in artist contracts ((with the possible exception of studio assistants), but if you’re a coach, therapist, or wellness practitioner, you likely have a non-compete in your employment or independent contractor agreement.

Employees and Independent Contractors: Check your agreement! Search for the word "compete." These clauses are sometimes included as separate agreements or in Confidential or Non-Disclosure (NDA) Agreements.

I Am an Employee or Independent Contractor–Does the New Rule Apply to Me?

The rule will ban new non-compete agreements for all workers and require businesses to renegotiate existing agreements with most workers.

The rule defines “worker” as anyone “who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”  

There are some exceptions.

Pretty much everyone is covered except for a few carve-outs. The new rule does not apply if the non-compete is part of:

1) An agreement with a senior executive. Can you or your workers be classified as “senior executives”? Yes, if you earn $151,164 and are in a “policy-making position”;

2) A bona fide sale of a business entity (meaning, you sold your company and agreed not to compete with the new owner);

3) A legal “cause of action” that accrued before the effective date (meaning, you’re part of a lawsuit. If you are in this situation, consult your lawyer before proceeding!). 

Also, persons engaged in a good-faith attempt to enforce or make representations about a non-compete they believe to be valid will not be held liable. (This is fuzzy. Basically, if you think the non-compete will still apply based on this new rule, you may not be held liable if it turns out the new rule does apply. If you are in this situation, consult your lawyer before proceeding!)

I Am a Business Owner–Are My Worker Agreements Void?

For workers who are not senior executives, existing non-competes are no longer enforceable after the final rule’s effective date. Employers must provide such workers with existing non-competes notice that they are no longer enforceable. The final rule includes model language that satisfies this notice requirement.

Do I Need to Update My Agreements?

Formally? You’re not legally obligated to update your agreements until 120 days after the rule is published in the Federal Register.

Practically? New hires will be empowered to refuse non-competes based on the likelihood that the rule will be published and enforced.

We advise that you plan for compliance, which means reviewing your existing agreements now in anticipation of the change. Re-read your agreements and undertake the “No Non-Compete Needed Check-Up” below.

Should I Be Worried?

Yes and no.

First, non-competes are not particularly effective tools for creatives, and many states already banned their use. We don’t draft them very often.

Rather than relying on draconian non-competes, we encourage you to focus on protecting the intellectual property and proprietary information that makes your business unique.

First, trade secret laws and NDAs remain tried-and-tested methods of protecting intellectual property and proprietary information. The ruling does not affect these forms of protection.

Second, our worker agreements contain clauses that employ trade secret and NDA protections to protect their business, network, and brand. We recommend that our clients review their existing contracts and undertake the following check-up:

No Non-Compete Needed Check-Up:
1) identify and protect your confidential information;
2) understand and communicate your non-disclosure clause; and
3) ensure you have and enforce a non-solicitation clause, and add a non-disparagement clause, too!

Our clients needn’t worry because all three clauses are included in any employee or independent contractor agreement or template we’ve drafted or negotiated.

If you need to discuss or update either of these provisions, reach out and schedule a meeting.