FTC Bans Non-Competes (For Now)

On April 23, the Federal Trade Commission published a final rule banning the enforcement of most non-compete agreements.  The rule does not take effect immediately.  It goes into effect in four months, and it is already subject to legal challenges that are being filed to stop the rule from going into effect.  Nevertheless, it is important for businesses to understand what the rule prohibits and requires.

Under the rule, existing non-competes for the vast majority of workers will no longer be enforceable once the rule goes into effect.  This means that non-compete agreements that employees signed will not be valid, regardless of when they are signed.  The only exception is that pre-existing non-compete agreements with “senior executives” may remain in effect.  “Senior executives” are defined as workers earning more than $151,164 annually and who are in policy-making positions (e.g. C-level executives).  The rule also requires employers to provide “clear and conspicuous notice” to all employees whose contracts contain unenforceable non-compete agreements.  The FTC’s rule includes model language for this notice requirement.

In addition, the rule prohibits employers from entering into or attempting to enforce all new non-competes after the rule takes effect—including for senior executives.  The only exception is for non-competes that are agreed to in a sale of business.

The FTC’s rule broadly defines “non-compete clause” as any condition of employment prohibiting or penalizing workers from seeking or accepting work after the conclusion of employment, and emphasizes that the term is not limited to clauses explicitly labeled as “non-competition” agreements.  Instead, whether a contractual provision constitutes a “non-compete clause” is a “fact-specific inquiry” and could potentially include other types of restrictive covenants, such as non-solicits and confidentiality agreements.

Uncertainty for Non-Profit Healthcare Organizations

There is uncertainty about the extent to which the new rule applies to non-profit entities such as many healthcare organizations.   The FTC has jurisdiction over entities that are “organized to carry on business for [their] own profit or that of [their] members.”  But the rule makes clear that merely claiming tax-exempt status is not sufficient to be exempt.  Instead, the FTC will apply a two-part test to determine whether a non-profit entity is subject to the rule, evaluating whether the entity is engaged in business for a charitable purpose, and whether the entity or its members derive a profit.  Notably, before voting for the final rule two FTC Commissioners discussed the high number of comments received from the healthcare industry and warned that non-profit healthcare organizations that derive a profit from their business are subject to the rule.  It is unclear how courts will apply this aspect of the rule to certain not-for-profit entities.

Takeaways for Clients

There are significant legal questions regarding the FTC’s authority to take this action, and a lawsuit challenging the new rule was filed in federal court within hours of its release.  This (and other) legal challenges could delay enforcement of the rule or stop it from going into effect completely, but only time will tell.  We will keep you posted regarding any developments in the litigation.

In the meantime, clients should comply with applicable state non-compete laws and ensure that trade secret protections such as confidentiality and non-disclosure agreements are up to date and effective.

Please reach out to any Miller Johnson employment attorney if you have any questions.