New Update on FTC’s Post-Termination Non-Compete Ban

Unless enjoined by a U.S. court, the new Federal Trade Commission national ban on post-term non-competes (the “Final Rule”) will take effect on September 4, 2024. Importantly, the Final Rule explicitly exempts the franchisor/franchisee relationship, although post-term non-competes in this context remain subject to federal anti-trust rules and applicable state law. 

The Final Rule will apply to the post-termination relationship between franchisors and their workers and franchisees and their workers. Non-competes during the term of employment are not banned.

The Final Rule defines a post-termination non-compete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different employer where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The definition of “worker” includes employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide services. There is an exemption for Senior Executives who make more than $157,164 annually and are in a “policy making position.” This exemption only applies to Senior Executives who signed their post-term non-compete before September 4, 2024.

Businesses who previously had workers sign a post-term non-compete must provide notice to those workers before September 4, 2024, that it is no longer enforceable. The Final Rule contains model language for the notice.

What should franchisors do now:

1. Identify those of its employees who signed a non-compete relative to the United States.
2. Prepare a notice for those employees.
3. Review the U.S. form of Franchise Agreement and FDD for possible changes relating to a franchisee’s workers.
4. Review the U.S. Operations Manual and other standards and policies for possible changes relating to a franchisee’s workers.
5. Review other restrictive covenants (e.g., Non-Disclosure and Non-Solicitation Agreements) relating to franchisor’s workers and a franchisee’s workers. [Note that they can’t be so broad as to functionally prevent a worker from working for someone else. Note that confidential information should not be defined too broadly.]
6. Consider other IP protections (e.g., Trade Secret practices and Copyright).
7. Inform franchisees that the Final Rule is coming into effect and that they should investigate it as part of the franchise agreement’s requirement to comply with all applicable laws.

We recommend holding worker notices and not formally changing your FA and FDD until the end of August to see whether the Final Rule may be enjoined, but you should be ready if it is not. Note that it has already been enjoined by a federal court in Texas for the named plaintiffs which includes the U.S. Chamber of Commerce (but interestingly not its members). In that case, the plaintiffs are asking that the ban be prohibited throughout the United States. It is possible this relief will be granted. In issuing the injunction, the federal court has already stated that plaintiffs have proved a likelihood of success on the merits of their claims that among other things the FTC lacks the statutory authority to issue substantive (rather than housekeeping) rulemaking regarding unfair methods of competition. With such authority being reserved for Congress.

If you need our assistance with any of the action items above, please contact Hodgson Russ Franchise & Distribution Practice Leader George Eydt (416.595.2671).

Disclaimer

This client alert is a form of attorney advertising. Hodgson Russ LLP provides this information as a service to its clients and other readers for educational purposes only. Nothing in this client alert should be construed as, or relied upon, as legal advice or as creating a lawyer-client relationship.