Federal Ban on Non-Competes

On April 23, 2024, the Federal Trade Commission (FTC) rolled out its final rule essentially banning non-compete agreements. The new rule will go into effect Sept. 4, 2024, and will affect, according to the FTC, 30 million people or 18 percent of the American workforce who are under some form of non-compete agreement. Employers, including hospitals and other health care industry entities, who fail to abide by the new rule may face an adverse FTC enforcement action, prohibitive injunctions and, ultimately, civil penalties amounting to $10,000 per individual offense.

The new rule invalidates any existing non-compete agreements. These non-compete agreements do not need to be formally rescinded in writing, but employers must notify workers – including contractors – that any existing non-compete provisions will be unenforceable. This notification requirement applies to current and past paid workers, such as employees and contractors, as well as unpaid workers, such as volunteers or interns. Employers are also prohibited from entering into new non-compete agreements with their workers.

Limited Exceptions

Existing non-compete agreements covering senior executives can remain in effect, but new non-compete agreements are forbidden for all employees, including senior executives. The FTC defines the term “senior executive” as a worker earning more than $151,164 who is in a “policy-making position.”

The other notable exception to the new rule is the buyer/seller exception. When an individual who owns 25 percent or more of a business entity as an owner, member or partner sells that entity, the seller can be properly bound by a non-compete agreement.

NDAs and Non-Solicitation Covenants Survive

Trade secret laws and non-disclosure agreements (NDAs) remain in effect under this new rule. Companies can continue to require employees to keep their trade secrets and other competitively sensitive information confidential and to not use it for the benefit of a competitor. However, under the rule, NDAs must not be so onerous that they effectively become non-competes by, for example, forbidding discussion of an entire industry.

Non-solicitation agreements (regarding both employees and customers/clients), per FTC guidance, “are generally not non-compete clauses” because they “do not prevent a worker from seeking or accepting other work or starting a business.” However, like NDAs, non-solicitation agreements can run afoul of the non-compete rule if the non-solicitation agreement is drafted so broadly that, in function, it prevents a worker from seeking or accepting other work or starting a business.

Application to Nonprofit Health Systems

Although the FTC recognized it does not have jurisdiction over not-for-profit entities, it reserved the right to evaluate an entity’s nonprofit status and noted some “entities that claim tax-exempt nonprofit status may in fact fall under the Commission’s jurisdiction.” Specifically, the new rule states “some portion of the 58% of hospitals that claim tax-exempt status as nonprofits and the 19% of hospitals that are identified as State or local government hospitals in the data cited by AHA [the American Hospital Association] likely fall under the Commission’s jurisdiction and the final rule’s purview.”

Certain trade groups argue the FTC lacks clear authorization from Congress to pass a rule that revises the terms of employment. The U.S. Chamber of Commerce has sued to block enforcement of this non-compete rule. The organization cites recent U.S. Supreme Court precedent favoring what is known as the “major questions doctrine,” a legal canon of statutory interpretation that bars agencies from resolving questions of “vast economic and political significance” without clear statutory authorization from Congress.

Business groups likely will continue to argue the statutes granting authority to the FTC are too inherently vague to incidentally cover such a major question as the legality of non-compete agreements. Although the major questions doctrine is favored by the current Supreme Court, it remains to be seen whether this argument will be met with early success at the district court level.

For more information, please contact the Barnes & Thornburg attorney with whom you work or Thomas Hutchinson at 317-261-7975 or thomas.hutchinson@btlaw.com or Jason Schultz at 574-237-1210 or jason.schultz@btlaw.com.

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