By: Sarah E. Steinmann
The Federal Trade Commission (“FTC”) made a big splash this spring when it published its Final Non-Compete Clause Rule (“Rule”), which bans most post-employment non-compete agreements between employers and workers.
The FTC issued the Rule under its authority to regulate “unfair restraints on trade and business” and intends for the Rule to open the door for new businesses, innovation, and increased wages for workers.
Until now, non-compete covenants have been governed by state law, with the scope and enforceability of such arrangements varying widely. The Rule—set to go into effect on September 4—will affect businesses nationwide and across industries, including those operating in the healthcare space.
Applicability
Most healthcare entities will be subject to the Rule, which applies to “all persons and private for profit business entities,” regardless of business structure. While non-profits are generally not subject to the Rule, the FTC will scrutinize non-profit corporations to determine “whether either the corporation or its members derive a profit.” If they do, the Rule will apply.
On the other hand, anyone who produces work for a business, including employees, independent contractors, interns, and even unpaid volunteers, is considered a “worker” protected under the Rule.
FTC Defines Non-Compete Clause
A non-compete agreement is a restrictive covenant that prevents a worker from working for or operating a business that is competitive with the employer after the worker ceases to work for the employer.
The Rule implements a broad definition of “non-compete clause” to include restrictions in employment agreements, workplace policies and even oral agreements between parties. Any term or condition of employment that “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” working for or operating a business after their employment with the employer ends is prohibited under the Rule.
The Rule also extends to other types of restrictive covenants such as non-disclosure and non solicitation agreements—if they have the same effect as a standard non-compete (i.e. if they prevent a worker from, or penalize a worker for, seeking or accepting work after their employment ends). Businesses that offer on-the-job training should be aware that training repayment agreements might be challenged under the Rule.
Exceptions
The Rule does not prohibit restrictions on workers during their employment, so a business can prevent workers from simultaneously working for their competitors. The Rule also allows noncompete restrictions between buyers and sellers of a business in connection with the sale of a business or an individual’s ownership interest.
Existing Covenants
The Rule is retroactive, so non compete agreements made before September 4 between businesses and their workers will become unenforceable.
One notable exception will allow businesses to enforce existing noncompetes against their senior executives. A “senior executive” is an employee who earns more than $151,164 per year, who is in a “policy-making position,” and who has “final authority” over decisions controlling a significant aspect of the business. For most physicians, the question of whether they are in a “policy making position” will be the most controversial in determining the enforceability of a restrictive covenant.
State Laws
Physicians and healthcare businesses may be familiar with existing state laws and regulations and shouldn’t assume they no longer apply. While the Rule supersedes existing state laws and regulations that conflict with it, states are free to regulate non, compete covenants outside the Rule’s scope.
Next Steps for Employers
Employers will need to notify every worker subject to a non compete that it is no longer enforceable, so businesses should start identifying workers affected by the Rule. They should also start preparing the notices, which must be “on paper” and delivered personally or by mail, e mail, or text message. Businesses might also consider why they used noncompetes and how they might achieve their business aims within the bounds of the Rule.
Legal Challenges
Employers rushed to challenge the Rule in court, seeking injunctions to prevent it from going into effect. A federal judge in Texas issued a preliminary injunction temporarily halting implementation of the Rule and is expected to issue a final decision by August 30. In a separate case in Pennsylvania, the court rejected the employer’s request for an injunction. Businesses should keep an eye out for developments as the September 4 effective date approaches. Because of the pending litigation and the plethora of cases we expect to be filed in the coming months, ultimately, this is an issue that will probably reach the Supreme Court for a final determination.
If you have questions about the enforceability of your restrictive covenants, it is crucial to act now to ensure your agreements are in full compliance with the FTC’s new Rule before the September 4 deadline. For questions, contact Lippes Mathias attorney Sarah E. Steinmann by phone at 315-477- 6232 or by email at ssteinmann@lippes.com.
Significant research for this piece was performed by Jennifer E. Forward, summer associate, Albany Law School (anticipated Class of 2025).