10 Things to Know About the Ban on Non-competition Agreements

On April 23, 2024, the Federal Trade Commission (FTC) announced an administrative rule that would ban almost all non-competition agreements. The rule is scheduled to take effect in about four months (around August 2024). Within a couple days several businesses, including the U.S. Chamber of Commerce, filed lawsuits requesting that the rule be overturned. The courts may either reject the rule entirely, delay the effective date of the rule, or uphold the rule and permit it to take effect.

Until we know which approach the federal courts will take, here are 10 key things for employers and employees to know:

1. What still applies now. Until the rule takes effect, the laws of each individual state still apply. Therefore, in more than 40 states, including Ohio, Kentucky, and Indiana, the estimated 100 million employee non-competition agreements in existence can be enforced to the extent that time and geographic restrictions outlined in the agreements are reasonable. Lawsuits that are already pending may continue.
2. What will be prohibited. The federal rule would make it illegal to enter into a non-compete clause, attempt to enter into a non-compete clause, enforce or attempt to enforce a non-compete clause, or represent that a worker is subject to a non-compete clause.

3. Types of agreements that will be covered. The rule defines a “non-compete clause” 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 or operating a business in the United States. The FTC states that language “does not categorically prohibit other types of restrictive employment agreements.” Non-disclosure agreements (NDAs), customer non-solicitation agreements, and training repayment agreement provisions (TRAPs) are most likely to remain viable and enforceable. However, even those agreements will be subject to scrutiny under this rule if the terms and conditions are “so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker” from seeking or accepting work or operating a business in the United States.
4. Senior executives. Agreements made with senior executives before the rule’s effective date are not subject to the new rule. In other words, those agreements will remain enforceable. However, any similar agreement that is entered into after the rule’s effective date will be banned under the new rule.

A “senior executive” is a worker who (1) makes more than approx. $151,000 annually and (2) is in a policy-making position.

A “policy-making position” means a business entity’s president, chief executive officer or equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority. An officer of a subsidiary or affiliate of a business entity might be deemed to have a policy-making position.

“Policy-making authority” means final authority to make policy decisions that control significant aspects of a business entity or common enterprise. This does not include authority to advise or exert influence over such policy decisions or having final authority to make policy decisions for only a subsidiary or an affiliate of a common enterprise.

“Officer” means a president, vice president, secretary, treasurer or principal financial officer, comptroller, or principal accounting officer, and any natural person routinely performing corresponding functions with respect to any business entity, whether incorporated or unincorporated.

5. Employees and more. The new rule is not limited to employees. It will apply to independent contractors, externs, interns, volunteers, and apprentices as well.
6. Non-profit corporations.Generally speaking, the FTC’s authority is only over entities that are “organized to carry on business for [their] own profit or that of [their] members.” However, the FTC states that “both judicial decisions and Commission precedent recognize that not all entities claiming tax-exempt status as nonprofits fall outside the Commission’s jurisdiction.” The Commission applies a two-part test that is complex and far from a bright-line standard. The healthcare industry, where many hospitals are non-profit entities, is a substantial area where this issue will arise.
7. Banks, savings & loans, and credit unions. Congress’s overall grant of authority to the FTC does not include banks, many savings & loan institutions, or federal credit unions.
8. Sale of business. A buyer often demands that the seller of businesses agree not to compete with the buyer after the business is sold. These types of agreements would remain enforceable even under the new FTC rule.
9. What employers will need to do. Employers will need to take affirmative steps to notify employees. The rule requires the employer to provide written notice to anyone impacted. The FTC provided a template letter in the rule itself. The employer must provide the letter in person, by mail, by email, or by text message. If the employer does not have that information, then the employer is exempt from the notice requirement for that person.
10. Litigation challenging the rule. Two lawsuits have already been filed in Texas challenging the FTC’s authority and the process it followed in enacting this rule. Therefore, those federal courts will determine whether Congress granted sufficient authority for the FTC to take this action and whether an administrative rule can essentially void millions of pre-existing private contracts. In light of the stakes, those lawsuits will very likely not be final until after appeals to the 5^th Circuit Court of Appeals and possibly the U.S. Supreme Court.