By May 3, 2024 Compliance

Article courtesy of  Practice Compliance Solutions (“PCS”)

As PCS has been stating for over a year, the implementation of an FTC rule banning most all non-competes was imminent – and now has happened.  Although sweeping in its scope and seemingly non-existent exemptions, the 570-page rule is still very complex. While some clarifications may be forthcoming, this is a summary of the Rule as we understand it at this time.

So what does the rule say?

  • The Federal Trade Commission has stated for years it considers non-compete agreements in any form between any entities was an unfair trade practice and all non-competes should be made illegal. The new ruling took years to draft and had thousands of comments during the posting period.  The VAST majority of comments supported the FTC’s position.  While some challenge the authority of the FTC to make this rule, amendments to Section 5 of the FTC charter made over many years grant made it clear both Congress and the SCOTUS have expanded the power of the FTC to be essentially the same as Congress.  While challenges to the ruling are inevitable, potential for success is doubtful.
  • The new rule eliminates the ability to impose non-compete agreements in contracts with most all “persons” (exemptions discussed later). The rule also eliminates the ability to enforce the terms of all existing non-competes with employees. 
  • The term “person” is broadly defined to include all workers, independent contractors and employees from staffing agencies. The rule does not apply to to workers outside the United States.
  • The term “non-compete agreement” is also broadly defined as anything that “functions to prevent or penalize another person from seeking work from another person or start their own business after leaving their current employment”. There are exceptions from contractually restraining access to or taking trade secrets or intellectual property from the existing employer.
  • The Federal Rule supersedes ALL State or local rules unless the local rule creates a MORE restrictive condition than the Federal Rule.
  • The final rule specifically states the lack of evidence for further investigation or comment on anything in the rule.
  • The rule will go into effect 120 days after publication in the Federal Register (an imminent action).

Are there exceptions?

  • The first thing to clarify is information circulating that healthcare workers are not bound by the Rule. To the contrary, dozens of pages in Part V.D specific to this topic end with the Commission’s statement “the Commission declines to adopt an exemption specifically for the healthcare industry”.
  • Non-competes may be used in the sale of a business or between partners or members of a corporation that have controlling interest, defined as at least 25% ownership.
  • Although rarely, if ever applicable to small healthcare practices, the one cited exemption is for what the Commission calls “Senior Executives”. The Commission defines Senior Executives similar to conditions under the FLSA regarding both salary and duties tests – although the non-competes terms are far more stringent.  To be classified as a Senior Executive, the following must be applicable:
    • Person makes an annualized salary of at least $151,164, AND;
    • Person has policy making decision authority over “significant aspects of the business entity at the highest level of the organization”. Examples are cited as the President or Chief Executive Officer or other officer with equivalent decision making authority.  Decision making authority must apply to the entire business, not a component or section of the business (ex.  An HR Manager would not qualify even if they have total authority over the human resource decisions in the practice).

It would appear that satisfying both these conditions in a healthcare practice would be very rare if not impossible.

What must employers do?

For cited reasons of simplifying implementation, the Rule does not rescind existing non-completes – it simply makes it illegal to enforce them (bureaucrats – go figure).  Within 120 days of the effective date of the Rule, employers must notify any person with a non-compete that the non-complete “cannot and will not be enforced against them”.  The Rule does not require the non-compete be removed from any existing contract, despite the fact it will not be enforceable.  A sample notification is provided on page 566 of the Act (https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf ).  Obviously, no `contracts issued to persons after the effective date can contain non-compete agreements – and any non-compete included in any agreement between now and the effective date will not be enforceable.

You can read the entire Rule as referenced above.  The FTC has also issues a condensed FAQ that can be referenced at https://www.ftc.gov/news-events/news/press-releases/2024/04/fact-sheet-ftcs-proposed-final-noncompete-rule .

Although there appears to be no legal way around the new ruling, PCS encourages any doctor making decisions outside the apparent intent of the Rule to do so only after obtaining legal counsel from a board-certified employment attorney.