The Federal Trade Commission’s ban on non-competes

, | May 20, 2024

The Federal Trade Commission’s ban on non-competes

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a controversial final rule that will ban employers nationwide from incorporating non-compete clauses in employment contracts and company policies for most workers.

The final rule is effective September 4, 2024. However, several lawsuits have been filed to halt the implementation of this final rule.

Non-compete clauses have historically been governed and enforced by state law, rather than federal law. However, the federal government has now stepped in to establish a nationwide rule on non-competes. In general, the FTC’s ban on non-competes makes it an “unfair method of competition” to:

  1. enter or attempt to enter into a non-compete clause;
  2. enforce or attempt to enforce a non-compete clause; or
  3. make representations that workers are bound by a non-compete clause.

The final rule does not require companies to affirmatively rescind prior non-competes, although it does require companies to give workers notice that their non-competes are no longer enforceable. The final rule, however, carves out several exceptions to this ban.

Prohibition on Non-Competes

The final rule prohibits any person (including a private individual or a business entity) from entering into, attempting to enforce, or representing that a worker is subject to a non-compete clause.

Non-compete clause means: (1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

  • seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
  • operating a business in the United States after the conclusion of the employment that includes the term or condition.

Notably, the definition above is not limited to written contracts. Rather, it also encompasses workplace policies that prohibit a worker from, or function to prevent a worker from, seeking or accepting work for another business or operating a business following the worker’s termination.

Exceptions to the Ban on Non-Competes

The rule itself includes several exceptions:

  • First, the final rule does not invalidate existing non-competes with “senior executives,” but employers are prohibited from entering into new non-competes with such senior executive. A “senior executive” is defined as any worker earning more than $151,164 annually who is in a “policy-making position.”
  • Second, the final rule also does not cover nonprofits. Any nonprofit claiming an exemption must not only claim tax-exempt status, but also “whether the corporation is organized for and actually engaged in business for only charitable purposes, and to the destination of the income.”
  • Third, the final rule does not cover non-compete clauses entered into pursuant to a bona fide sale of 1) a business entity, 2) an individual’s ownership interest in a business entity, or 3) substantially all of a business’s operating assets.
  • Finally, employers may continue to rely on trade secret law and may continue to have nondisclosure or non-solicitation provisions that preclude former employees from soliciting company employees or customers.

None of these exceptions applies if the applicable state law would not also make these exceptions. The final rule supersedes state law only to the extent that state law provides less protection, but not if it provides more protection to workers. For example, physician non-compete clauses are completely void in some states, including in Colorado, Delaware, Massachusetts, New Hampshire, and Rhode Island. Other states, like California, ban all non-competes with a few narrow exceptions. So, in states with total bans on non-competes, the FTC’s exception for “senior executives” will only prevent the FTC from enforcing the final rule, but state law would still prohibit such non-competes.