FTC Approves Nationwide Ban on Non-Competes
FTC Approves Nationwide Ban on Non-Competes
April 24, 2024
On April 23rd, the Federal Trade Commission Issued a Final Rule Banning Non-Competition Clauses in Employment Agreements
The FTC claims that non-competes are unfair restrictions on competition. This is a blanket prohibition that will apply across the country and will go in effect 120 days after publication in the Federal Register. The final rule supersedes, replaces and voids any state statute or case law that would otherwise permit a non-compete. (The legal citation for the final rule is 16 CFR 910.)
We expect lawsuits to be filed immediately claiming that the FTC lacks the legal authority to pass such a sweeping law change outside of the democratically elected Congress. The final rule will likely be enjoined. This means that a federal court would issue an injunction staying the rule’s implementation pending a final judicial determination of the rule’s legitimacy.
In the meantime, it’s important to understand what the final rule says and what, if anything, you may need to do.
The Ban Applies to Non-Competes in Employment Agreements. Non-Competes that are Part of a Business Sale Agreement Remain Enforceable
Under the final rule, existing non-competes for the vast majority of workers will no longer be enforceable after the rule’s effective date, 120 days after publication. Non-competes in employment contracts that were in existence before will no longer be enforceable. And no new non-competes can be adopted after the effective date. Doctors and other health care workers are specifically not exempted – nor is anyone else.
The only exception will be for pre-existing non-competes that apply to “senior executives.” Once we hit the effective date, any non-compete in a new employment contract for a senior executive will be unenforceable.
This is a ban on non-competes in employment agreements. It does not affect non-competes that are given by people selling their businesses. Those will continue to be enforceable, because they are fundamental to protecting the goodwill value of the business being acquired. The FTC does not view those as unfair restraints on competition.
The Exception for Senior Executives is Very Limited and Will Not Cover Associate Dentists and Dental Specialists
Again, the only exception to the non-compete ban is for “senior executives,” where that non-compete was in effect prior to the final rule’s effective date. The definition of a senior executive has a two-part test, an earnings test and a job duties test. The reason for both tests is that even a highly paid employee may have little bargaining power to set his or compensation in exchange for accepting a non-compete.
Under the earnings test, the individual must earn at least $151,164 per year. Under the job duties test, the individual must be someone in a “policy-making” position. Here is where the final rule gets really strict. To be in a “policy-making” position, you have to be in charge of determining policy for the overall business. That means either being an owner or an officer at the highest level of the company, i.e., the President or CEO. This effectively exempts associate employees from being classified as senior executives.
The Final Rule Bans Non-Competes Broadly, Anticipating and Prohibiting Various Ways to Skirt the Rules
In the final rule, the term “non-compete clause” is defined as a term or condition of employment that either “prohibits” a worker from, “penalizes” a worker for, or “functions to prevent” a worker from seeking or accepting work with a new employer or operating a business after the conclusion of employment. A direct prohibition on, say, working within a 10-mile radius of the office for a two-year period is clearly prohibited under the final rule.
But other clauses that penalize or function to prevent the employee from leaving and competing will also be banned. One such clause would be a “liquidated damage” provision. For example, the employee could not compete against you unless he or she paid you liquidated damages of $50,000 or $100,000. Another banned provision would be a “forfeiture-for-competition” clause where the employee forfeits promised pay or benefits if they leave and compete. A third example would be a training-repayment agreement (TRAP) that requires the worker to pay the employer for training costs if the worker’s employment terminates and the payment is not reasonably related to the costs the employer incurred to train the worker.
Non-Disclosure and Non-Solicitation Covenants Will Remain Enforceable So Long as they Don't Function to Prevent the Employee from Working Elsewhere
The Non-Disclosure and Non-Solicitation covenants are the other standard restrictive covenants (in addition to the non-compete) that appear in an associate’s employment contract. Here the associate promises not to disclose anything confidential about your practice, he or she won’t take a list of your patients and referral sources, and won’t solicit, directly or indirectly, your patients, referral sources and employees.
These are very reasonable provisions, and it is almost inconceivable that a court would find that they function to prevent the employee from finding other gainful employment.
The Final Rule Applies to Both Employees and Independent Contractors
The title of the worker does not matter. The ban on non-competes applies to an “employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”
What Should You Be Doing at this Point?
Right now, nothing. Lawsuits will be filed in the next couple of days to enjoin the rule from going into effect. Courts will take a couple weeks to determine if they are going to enjoin it. If the final rule is not enjoined, then it will go into effect 120 days after it is entered in the Federal Register. If, as we expect, it is enjoined, then the rule will be stayed while the litigation works its way through the court system, where it could be struck down. In addition, if a new administration is elected in November, it is highly likely that the final rule will be rescinded.
What Will Happen if the Courts Allow the Final Rule to Go into Effect?
If this happens, then employers will have to notify their workers that their non-compete clauses will no longer be enforced. Employers do not have to make formal amendments to the employment contracts removing the non-competes. Instead, they would just have to “provide clear and conspicuous notice to the worker by the effective date that the worker’s non-compete clause is no longer in effect and will not be, and cannot legally be, enforced against the worker.” The notice can be delivered by hand to the worker, by mail to their home address, by email, or by text.
The FTC has prepared the following sample notice which you can use:
A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [EFFECTIVE DATE OF FINAL RULE]:
- You may seek or accept a job with any company or any person – even if they compete with [EMPLOYER NAME].
- You may run your own business – even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].
The FTC new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking
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