Foreign semiconductor manufacturers that invest in building manufacturing capacities in the U.S., amid increasing geopolitical tensions, are encountering new hurdles posed by the U.S. Federal Trade Commission (“FTC”)’s most recent comprehensive ban on non-compete clauses. These foreign semiconductor manufacturers commonly relied on non-compete clauses implemented in employment agreements to safeguard their investments, particularly in states like Arizona and Texas. Nevertheless, with the FTC’s comprehensive ban on non-compete clauses, these foreign semiconductor manufacturers are now urged to revise their intellectual property and trade secrets protection strategies.
FTC’s Non-Compete Ban
On 23 April 2024, the FTC issued the Non-Compete Clause Rule (the “Final Rule”), which extensively forbids non-compete agreements between employers and their employees. The Final Rule is set to take effect on 4 September 2024 (the “Effective Date”), which is 120 days following its publication in the Federal Register.
Overview of FTC's Final Rule and its Implications
§ 910.1 of the Final Rule defines the non-compete clause as a “[t]erm or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from i) seeking or accepting work in the U.S. with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or ii) operating a business in the U.S. after the conclusion of the employment that includes the term or condition.”
The Final Rule prohibits employers from implementing or attempting to implement de facto non-compete clauses with employees on or after the Effective Date. Furthermore, the Final Rule generally renders most existing non-compete clauses invalid, except for those entered into before the Effective Date with senior executives, who hold “policy-making positions” and earned annual compensation no less than $151,164 in the preceding year. Another exception provided under the Final Rule allows for non-compete clauses entered into as part of a bona fide sale of a business entity or of an individual’s ownership interest amounting to at least 25% thereof.
Legal Obstacles to FTC's Final Rule
On 24 April 2024, the US Chamber of Commerce filed a lawsuit in the Northern District of Texas, asserting that the FTC exceeded its legal authority in issuing the Final Rule. To date, there have been at least three lawsuits challenging the FTC's rulemaking authority under various doctrines, including the major questions doctrine and the non-delegation doctrine. These legal challenges may result in a preliminary injunction being issued against the Final Rule.
Strategies Ahead
Despite the possibility of judicial intervention against the Final Rule, it is crucial for foreign semiconductor manufacturers and other American employers not to passively await the legal process to conclude, which could extend up to 18 months until the Supreme Court makes a final decision. Instead, these companies should take proactive steps to devise innovative strategies to mitigate the broad impacts introduced by the Final Rule. It is essential to re-evaluate commonly implemented measures such as garden leave, confidentiality agreements, and non-solicitation agreements to ensure they effectively address the gap created by the Final Rule. However, in modifying these existing restrictive agreements, foreign semiconductor manufacturers must exercise caution to avoid inadvertently transforming them in to de facto non-compete clauses, which are also prohibited by the Final Rule.
Fortior Law’s Expertise in Trade Dispute Litigation and Compliance Management
At Fortior Law, we have extensive experience in trade litigation and compliance management. Our lawyers achieved multiple victories for clients in this area including obtaining the lowest duty rate in an antidumping investigation, succeeding in a petition for price undertakings and facilitating the clients’ compliance with the undertaking agreement throughout its term. Team members of our trade disputes practice speak English, French, Ukrainian, Mandarin and Korean while our head office is based at the seat of the World Trade Organisation, Geneva.
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