On April 29, 2024 the Federal Trade Commission ruled to ban noncompete clauses. This far-reaching decision has strong implications across industries from technology to healthcare. Following our webinar on the topic (which can be viewed here), our team of employment, healthcare and litigation attorneys have compiled the below FAQs.
What does the Rule prohibit?
The Rule prohibits any “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The Rule utilizes a broad definition of “worker,” to include any person who works, whether paid or unpaid, for an employer. This includes, but is not limited to, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.
When does the Rule take effect and are there Notice requirements?
The Rule takes effect 120 days from its publication in the Federal Register. Prior to the Effective Date, employers will have to provide current and former employees, who do not fall under any of the exceptions to the Rule, with clear and conspicuous written notice that their non-competes cannot be enforced against them.
Does the Rule apply to existing noncompete agreements?
All non-competition agreements between an employer and a worker shall be void and unenforceable 120 days following the publication of the final rule, with the exception of existing agreements with senior executives or arising in the context of a sale of the restricted party’s business. Under the Rule, senior executives must earn at least $151,164 per year (including salary, bonus and commissions) and must be in a “policy making position.”
What is the definition of “noncompete” under the Rule?
The definition of non-compete under the Rule is a clause that “penalizes a worker” or “functions to prevent a worker” from “seeking or accepting work” or “operating a business.”
Are non-solicitation agreements covered under the Rule?
The FTC has stated that non-solicitation agreements are generally not non-compete clauses under the Rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect, prevent a worker from seeking or accepting other work or starting a business. However, non-solicitation agreements may satisfy the definition of non-compete clause where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends. Therefore, whether a non-solicitation agreement meets the non-compete definition under the Rule is a very fact specific inquiry.
Are non-disclosures agreements covered under the Rule?
The FTC has stated that NDAs may be non-competes under the “functions to prevent” prong of the non-compete definition if they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.
Are there exceptions to the Rule?
The Rule does not apply to non-compete agreements that are ancillary to a sale of business. It also does not apply to non-profit companies, certain healthcare providers, banks, and Senior Executives.
Can outside activities be restricted during employment?
Yes. Exclusivity provisions, outside activity restrictions, or other non-competition restrictions during the term of a worker’s employment, such as prohibitions on moonlighting for other organizations while a current employee, are not prohibited.
Will non-competes that are incident to a partner buyout qualify for protection under the “sale of business” exception to the Rule?
Potentially, if they are structured properly. We anticipate that traditional buy-sell provisions in an entity’s governing document (e.g., an operating agreement) will require material restructuring in an effort to fit their associated non-competes within the “sale of business” exception.
Will non-competes against a “Friendly PC” owner be prohibited under the Rule?
“Friendly PC” owner is healthcare industry term that refers to a healthcare professional (e.g., medical doctor, dentist, or veterinarian) who serves as the record owner of a professional entity that is managed by an MSO, DSO or VSO in states that prohibit such management companies or their layperson owners from directly owning the professional entity.
A non-compete against a Friendly PC owner in an existing agreement will likely qualify for protection under the “senior executive” exception as long as the owner meets the elements of that exception described above (it is noteworthy that it is not uncommon for a Friendly PC owner’s job functions, as CEO or medical director, to include making clinical policies for the entity).
With respect to prospective non-competes, arguably, and by way of example only, the Rule does not prohibit a provision that restricts a Friendly PC owner from “owning” a competitor as long as such restriction does not prevent the restricted party from “providing services” to or “operating” the competitor. This could apply to a Friendly PC Owner who serves purely as the record owner of the PC and does not actually “work for,” “operate” or provide services to the competitor’s business (which are the activities that the Rule seeks to protect).
Will non-competes against entities be prohibited under the Rule?
Because the Rule is geared toward the protection of “natural persons” and not entities, non-competes against entities may potentially be preserved. However, if the entity is owned by a single owner (e.g., an entity that provides professional services to another through its sole physician owner), it is likely that the FTC will collapse such entity for purposes of applying the non-compete ban to such entity. Additionally, if the owners of such entity cannot secure employment or operate a business except through the restricted entity (e.g., if the TIN of that entity is not fungible because of payor contracts or other contractual relationships), it is likely that the FTC will invalidate the non-compete against the entity.
Disclaimer:
The answers to the FAQs are not intended to be, and do not constitute, legal advice. The applicability of the FTC’s Rule requires a fact-sensitive analysis depending upon each client’s particular situation.