On April 23, the Federal Trade Commission (FTC) voted to adopt a monumental final rule prohibiting employers from entering into non-competes against all workers within the jurisdiction of the FTC – a move that is poised to reshape how employers approach employment agreements.

The rule is set to go into effect 120 days after publication in the Federal Register (currently scheduled to occur on May 7), but implementation could be delayed due to pending litigation challenging the rule. Notably, the regulation includes a provision that the rule will not apply to a cause of action related to a non-compete clause that accrued prior to the Effective Date (presumably, which will be September 4, 2024). As a result, any current litigation involving a non-compete will not be impacted by the rule.

Highlights of the Final Rule

With limited exceptions, the final rule states that it is unlawful to enter into or attempt to enter into a non-compete clause or to enforce or attempt to enforce a non-compete clause or to represent to a “worker” that they are subject to a non-compete clause. A non-compete clause is defined as a term or condition of employment that prohibits, penalizes, or functions to prevent a worker from doing either of the following:

1. Seeking or accepting work in the U.S. following termination of employment.
2. Operating a business in the U.S. following termination of employment.

Interestingly, the regulations point out that “term or condition of employment” includes not only a contractual term or workplace policy but also includes oral instructions that may prevent someone from seeking or accepting work or operating a business.

The definition of “worker” extends beyond traditional employment relationships to encompass individuals providing services – irrespective of their status – including independent contractors, interns, volunteers, and sole proprietors. The rule also applies to indirect employment relationships, such as being placed to provide services through employment with a staffing company.

While non-disclosure agreements (NDAs), Non-Solicitation Agreements, and Training Repayment Agreement Provisions (TRAPs) are not categorically prohibited by the new rule, if they are deemed to be so broad as to “function” as a non-compete clause, then such agreements would also be deemed to be unlawful under the new regulation.   The regulation urges employers to conduct case-by-case evaluations of NDAs, Non-Solicitation Agreements and TRAPs to ensure compliance. Under the final rule, the prohibition of non-compete clauses does not apply to employees on garden leave because they are still in a period of employment.

Exemptions to the Final Rule

The final rule sorts forth the following few narrow exemptions:

• The jurisdiction of the FTC generally does not extend to nonprofits, which could include a large number of hospitals in the country. However, the FTC cautions that organizing as 501(c)(3) is not, by itself, enough to avoid FTC jurisdiction, such as nonprofits found to have ceded control to a for-profit member. 
• Existing non-competes with senior executives are exempt from the rule and remain enforceable, but new agreements after the effective date are prohibited. Senior executives are defined as holding a “policy-making position” (either the president or CEO of a business entity or one of a number of defined officers with policy-making authority for the business/common enterprise) and earning more than $151,164 annually.
• The rule does not apply to franchisees in a franchisee-franchisor relationship, but non-compete agreements between franchisors or franchisees and their respective workers are still covered by the rule.
• The rule does not apply to non-compete clauses arising from the “bona fide” sale of a business entity, a person’s ownership interest in a business entity, or all or substantially all of a business entity’s operating assets.
  • While bona fide sale is not fully defined by the rule, the FTC is clear that attempts to circumvent the ban through “sham transactions,” will be closely scrutinized, particularly those lacking negotiation opportunities for the affected parties.
  • While the rule provides clarity on certain aspects of non-compete clauses, ambiguities remain regarding agreements embedded within ownership structures like LLCs or partnerships. The distinction between employment-related and ownership-based restrictions presents challenges, with no definitive guidance provided. As employers navigate these complexities, careful drafting and consideration of the agreements’ nature will be essential in ensuring compliance with the FTC’s regulations.

Notice Requirements in the Final Rule

Employers are also required to give notice to employees, excluding senior executives, by the Effective Date that their non-compete clauses will not be enforced. No rescission is required, but this notice must be delivered by hand, by mail to the last known street address, by email or even by text message. The regulations provide that employers with no record of address, email or cell number are excused from the notice requirements.

Antitrust Implications of the FTC’s Non-Compete Ban

The FTC’s non-compete ban has significant implications for employers, particularly concerning antitrust regulations. The FTC, along with the Department of Justice (DOJ), enforces various antitrust laws, including those prohibiting anti-competitive agreements and monopolization attempts. The FTC operates independently as an administrative agency with its own commissioners and court system, distinct from the DOJ’s structure under the executive branch. If the FTC suspects criminal antitrust violations, it refers cases to the DOJ due to its lack of criminal enforcement authority.

While the FTC’s rulemaking authority with respect to these rules has already been challenged under doctrines like the major questions doctrine and non-delegation doctrine, employers need to be prepared for potential individualized enforcement actions. Remedies for violations of the non-compete ban include injunctive relief such as cease and desist orders and rescinding contracts, but the availability of monetary relief remains uncertain. Notably, there is no private right of action under Section 5 of the FTC Act, but private parties can complain to the FTC, leading to potential enforcement actions.

What Now?

Below are recommended actions employers can take now in preparation for the rule’s Effective Date.

• Inventory current non-competes.
• Assess whether non-competes are with senior executives (or whether non-competes should be obtained with senior executives prior to the Effective Date).
• Review the breadth of the NDAs, Non-Solicitation Agreements, and TRAPs used by the employer.
• Consider whether other policies “function” to prevent employment, keeping in mind the good faith exception.
• Prepare to provide notice to employees that the prohibited non-competes will not be enforce.
• Assess whether to pursue any existing breach of a non-compete clause before the Effective Date.