FTC Moves to Finalize Ban on Non-Compete Employment Contract Clauses

In response to the proposed rule, in 2023 HRS submitted a comment letter encouraging the FTC to finalize the ban on non-competes. In addition, HRS urged the FTC to ensure that physicians were not excluded from the definition of "worker" (as the FTC said it was considering). HRS is pleased to report that, in the final rule, the ban on non-compete clauses would apply to physician contracts (unless the rule does not apply to that organization or individual for other reasons).

While the rule is scheduled to be published in the Federal Register on May 7th, and will become effective September 4, 2024. The finalized policy is expected to encounter a number of obstacles prior to enforcement.  In near-immediate response, the U.S. Chamber of Commerce and the Business Roundtable filed a lawsuit challenging the FTC's authority to issue rules of this kind. In addition to legal challenges to the FTC's general authority to issue and enforce such policies, key questions remain regarding the extent to which the FTC jurisdiction applies to not-for-profit entities. In discussing these challenges, the FTC stated:

The Commission does not believe restating or further specifying each jurisdictional limit in the final rule's text is necessary; the FTC Act defines the limits of the Commission's jurisdiction and those limits govern this rule. Moreover, the Commission cannot here provide guidance that applies to every fact and circumstance. Whether an entity falls under the Commission's jurisdiction can be a fact-specific determination. An attempt by the Commission to capture all potential interpretations of the laws governing exclusions from the FTC Act may create confusion rather than clarity.

Further, the FTC final rule also allows some existing non-competes to remain in place for "senior executives" in certain situations, but new non-competes will be banned.  To illustrate the complexity of applying "senior executives" policy, the FTC states,

For example, many executives in what is often called the "C-suite" will likely be senior executives if they are making decisions that have a significant impact on the business, such as important policies that affect most or all of the business. Partners in a business, such as physician partners of an independent physician practice, would also generally qualify as senior executives under the duties prong, assuming the partners have authority to make policy decisions about the business. The Commission notes that such partners would also likely fall under the sale of business exception in § 910.3 if the partner leaves the practice and sells their shares of the practice.

HRS will continue to keep members updated.  It is expected that further interpretive guidance may be released. However, because of the already-filed and expected further litigation associated with the final rule, significant time might be required to understand the full scope and staying power of the new federal ban on non-compete clauses. Whether the rule is allowed to go into effect on September 4, 20024, will also likely need to be decided by the Courts where litigation has already been filed.