The recent FTC ruling banning non-compete clauses could significantly impact North Carolina businesses. Employers have used non-compete clauses to prevent employees from working for competitors or starting similar businesses after leaving their current employment.  However, the FTC has determined that these clauses can harm competition in labor markets by suppressing earnings and opportunities for workers.

This new FTC rule eliminates nearly all non-competes, either direct or indirect, throughout the entire nation. The only major exceptions exist for the sale of a business, and a carve-out for “Senior executives” that make at least $151,164 and have policy-making roles—the President, CEOs, etc. with authority over business aspects. The FTC rule does change the way NC courts have interpreted non-competes.

Previously, NC courts have not enforced overly broad territories or noncompete containing “indirectly competing” clauses.  In the 2023 case of Prometheus Group Enterprises, LLC v. Gibson, the North Carolina Business Court warned against the use of the phrase “directly or indirectly” in defining the scope of a non-compete and refused to enforce non-compete provisions that prevent a former employee from indirectly working for a competitor.  Prometheus Grp. Enters., LLC v. Gibson, 2023 NCBC 23.  This is in line with the North Carolina court’s general tendency to be cautious in enforcing non-compete agreements, particularly those with broad restrictions in both time and geography.

According to the government, the FTC’s new non-compete rule could potentially increase workers’ total earnings by close to $300 billion per year by increasing job mobility and competition among employers for workers. This could lead to higher pay, better benefits, and more favorable conditions for workers. However, it could also lead to increased competition among businesses, as employees would be free to switch jobs or start their own businesses without the restrictions of non-compete clauses.

In terms of enforcement, North Carolina courts have regarded FTC rules as guidance unless the rules have been expressly and timely adopted by reference in applicable state statutes.  Some states have already moved to ban companies from entering into non-competes with their employees (California, New York).  Therefore, the impact of the FTC’s new rule on North Carolina businesses may depend on how the state chooses to incorporate this rule into its laws.

In conclusion, the FTC’s ban on non-compete clauses could have significant implications for North Carolina businesses, potentially leading to increased competition and changes in employment practices.  Moving forward, employers should review their employment agreements with both current and former employees to assess whether non-compete clauses are included, and whether notice to those employees is required.  Against the backdrop of the FTC’s new rule, the overall national trend against non-compete agreements, and their interpretation in NC Business Court, non-competes are presently almost mostly dead.

For folks that prefer lists, the takeaways are:

Nonprofits are exempt from the rule which is based on Section 5 of the FTC Act. However, the FTC may scrutinize nonprofits to ensure they truly operate as such, beyond just having tax-exempt status.

The rule prohibits all non-compete agreements for all workers, effective immediately, except for existing agreements with “Senior Executives.”

a)      Existing non-competes with anyone not “Senior Executives” will be voided by the rule, and

b)      Essentially, everyone else with existing non-competes must be notified by the effective date that enforcement is invalid.

“Effective date” of the rule will take effect approximately 120 days after publication in the Federal Register, expected around late August 2024.

“Senior Executive” refers to someone in a policy-making role earning at least $151,164 annually.

a)      Current non-competes for Senior Executives remain valid; new ones must be established before the rule takes effect.

b)      “Policy-making position” includes Presidents, CEOs, or equivalents, with authority over significant business aspects.

“Business sales exception exists for non-competes associated with business sales.  If you sell or buy a business, the selling party can be bound by a non-compete.
Detailed information about the rule and FAQs can be found on the FTC website at Noncompete Rule | Federal Trade Commission (ftc.gov). The rule text starts on page 561 of a 570-page document.

For help with your small business’s legal needs, contact the clinic at businessclinic@elon.edu.