The Federal Trade Commission (FTC) approved a sweeping ban on non-compete agreements by employers on April 23, 2024, in a 3-2 vote. The final rule provides that it is “an unfair method of competition” and thus a violation of section 5 of the Federal Trade Commission Act (FTC Act) for persons to enter into non-compete clauses with workers on or after the final rule’s effective date. Any existing non-competes will become null and void, with one exception for existing non-competes for “senior executives,” as defined under the FTC Act. According to the final rule, any existing non-competes with other workers will not be enforceable, and employers must provide such workers with notice that the non-competes will not be enforced. Going forward, employers will be banned from entering into any new non-competes with any type of worker on or after the effective date unless an exception applies.

The final rule provides several exceptions, with the most significant exception for a bona fide sale of a business. Under the sale of business exception, non-competes are permitted between the seller and the buyer of a business. In addition, the FTC discussed in the final rule that it does not cover franchisor/franchisee non-competes. Franchisees are excluded from the definition of “worker” in the final rule. The FTC reasoned that the relationship between a franchisor and franchisee may be more analogous to the relationship between two businesses than the relationship between an employer and a worker.

Also exempt from the prohibition on non-competes are certain entities which fall outside of the FTC’s jurisdiction under the FTC Act. This includes, “banks,” “persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act of 1921.” The FTC also exempted an entity that is not “organized to carry on business for its own profit or that of its members” although the FTC, in the comment and response section of the final rule, stated that simply claiming non-exempt status does not mean the entity falls outside the FTC’s jurisdiction and, therefore, outside the non-compete ban.

The final rule clarified that States may continue to enforce laws that restrict non-competes and do not conflict with the final rule, even if the scope of the State restrictions is narrower than the final rule.

The effective date of the final rule is 120 days following publication in the Federal Register. However, a lawsuit has already been filed in Texas by the US Chamber of Commerce and several other groups seeking to enjoin the final rule.

The FTC received many comments from healthcare organizations who stated that some or all of the healthcare industry should be excluded from the ban, however the FTC declined to adopt that position. We will continue to monitor the rule and provide guidance on how it will impact those who operate in the healthcare space.

The final rule can be accessed here.

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