In April, the Federal Trade Commission (FTC) finalized its rule prohibiting the use of non-compete clauses in most employment contracts, which resulted in a significant shift in labor policy designed to promote competition, enhance worker mobility, and stimulate economic growth.
What prompted this ban? The FTC’s belief that these restrictive agreements hinder worker freedom, suppress wages, and impede innovation. The agency hopes that eliminating these clauses will create a more dynamic labor market that empowers individuals to pursue new opportunities and contribute to new businesses.
Let’s look at the Final Rule‘s four main provisions to understand how this ban potentially affects the commercial real estate industry, which has historically relied on non-compete clauses to protect proprietary information and maintain competitive advantages.
Provisions of the Final Rule
A ban on post-employment non-compete agreements
This rule prohibits employers from entering into, enforcing, or suggesting the existence of non-compete clauses. The rule defines the term “worker” as full-time employees, independent contractors, interns, volunteers, and other individuals providing services to an employer.
The comprehensive definition of this non-compete clause also includes terms or conditions of employment restricting a worker’s ability to seek employment elsewhere or operate their own business after terminating their relationship with their employer. In other words, the law could consider provisions appearing to be merely non-solicitation or non-disclosure agreements as prohibited non-compete clauses if they function effectively as such.
Grandfathering non-compete clauses for senior execs
The FTC’s Final Rule does include a limited exception permitting employers to keep existing non-compete clauses with senior executives. The Final Rule defines these senior execs as people earning at least $151,164 annually and holding policy-making positions like a CEO, company president, or the equivalent. A caveat to this rule: Employers may not enter into new non-compete agreements with senior execs after September 4, 2024.
Exception for non-compete clauses in business sales
The FTC’s Final Rule also doesn’t apply to non-compete clauses comprising part of a bona fide business sale, ownership interest in a business, or a substantial part of a business’s operating assets. In other words, companies can continue negotiating and obtaining non-compete clauses from people selling their ownership interests as part of a merger or acquisition.
Mandatory notice requirement
As of September 4, 2024, the Final Rule requires employers to tell workers subject to non-compete clauses that federal law makes these clauses unenforceable. Companies must provide this notice in writing, via email, text, or traditional mail. The following is an example of language you could use:
Dear employee,
Please be advised that your employment contract contains a non-compete clause. This clause is no longer enforceable under federal law, effective September 4, 2024. You can seek new employment or launch your own business without fear of legal repercussions.
Legal challenges prompted by the Final Rule
Shortly after the FTC announced the Final Rule, lawyers in the Eastern Districts of Texas and Pennsylvania and Northern District of Texas filed lawsuits, challenging that:
- The FTC overstepped its legal authority in issuing the rule, arguing that the agency’s enabling legislation doesn’t grant it power to ban non-compete agreements nationwide.
- The Final Rule represents an unconstitutional delegation of legislative power from Congress to an administrative agency. The lawsuits also argue that the Rule’s broad scope and impact require more specific guidance from Congress.
- The lawsuits state the plaintiffs’ beliefs that the FTC’s decision to ban non-compete agreements is “arbitrary and capricious” and argue the agency failed to consider less-restrictive alternatives that would have been equally effective in stimulating competition in the U.S. economy.
In late August, a Texas federal court blocked the FTC regulation that would’ve invalidated millions of existing non-compete agreements before it could go into effect. This decision was a significant victory for employers fearing the rule would have made it hard to protect their investments in employees and prevent misappropriation of sensitive information.
The Texas judge ruled that the FTC exceeded its authority in issuing the rule. The court found the FTC lacked the power to create substantive rules, and the rule was “arbitrary and capricious.” The court also noted that the FTC failed to consider less restrictive alternatives than a complete ban on non-competes.
Now what?
When the FTC issued its proposed rule in January 2023, the public had 90 days to comment. Over 26,000 people commented during the three-month window, with more than 25,000 people voicing their support of non-competes. The FTC used this public feedback to fine-tune its proposed rule.
For companies — including those involved in commercial real estate — concerned about protecting trade secrets and proprietary information, there are alternatives available for protecting investments.
For example, employers can use established legal mechanisms like trade secret laws and non-disclosure agreements (NDAs) to protect proprietary and sensitive information. Research showed that 95% of workers subject to non-compete clauses also had NDAs in place.
The FTC holds the position that employers who want to retain their employees should offer competitive wages and fair working conditions rather than relying on restrictive non-compete clauses. The agency believes such a strategy fosters a more dynamic, competitive labor market.
Because of the Texas court’s late-August decision, the FTC’s non-compete rule did not go into effect and is invalid nationwide. That said, as of April 24, 2024:
- 4 states have completely banned non-competes
- 10 states have income-restricted non-competes, including New Jersey and New York
- 24 states have limited non-competes based on other restrictions
- 12 states have no restrictions on non-competes at all, including Pennsylvania
For now, those in the commercial real estate industry can relax because we’re maintaining the status quo. For more information, check out this Thomson Reuters article featuring experts who recently shared their opinions on the agency’s failed non-compete ban.
What will we see in 2025? The FTC hasn’t indicated whether it will try again, but if you operate in a state that doesn’t currently ban non-competes (or has limited restrictions), it’s worth planning proactively to protect yourself and your business interests.
Are you a commercial real estate investor — or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
