The FTC Noncompete Ban: What It Means for Employers

On April 23, 2024, the Federal Trade Commission (FTC) announced a new rule that has a significant impact on employment and competition in businesses across the country–the FTC noncompete ban. This rule bans noncompete agreements in all sectors, introducing a major change in the business landscape for business owners nationwide. This rule presents a range of challenges and divergence from the current way most businesses operate.

Understanding the New FTC Noncompete Ban

The FTC’s final rule redefines “noncompete clause” very broadly to include any term or condition of employment that “prohibits,” “penalizes” or “functions to prevent” an employee from seeking work or starting a business in the United States after the termination of employment. High level points of the rule include:

• No new noncompete clauses between employers and employees going forward.

• Previously entered noncompetes become unenforceable, except for certain employees qualifying as “senior executives.”

• Employers required to provide actual notice to employees that their noncompetes are no longer enforceable.

• Creation of a narrow exception for noncompetes entered into as part of a “sale of business” as defined by the rule and for causes of action to enforce noncompetes that accrued prior to April 23, 2024. 

A Deeper Dive into Interpretation and Enforcement

Though the final rule is scheduled to take effect on August 21, 2024, there are already questions regarding its interpretations and legal challenges.  The challengers argue that the FTC noncompete ban exceeds the FTC’s statutory authority, violates constitutional law and the Administrative Procedure Act, and ignores potential pro-competitive benefits of noncompetes.

In addition, there are a number of questions surrounding the interpretation of some of the new terms and definitions.

Clauses included in the rule. For instance, the rule includes clauses that “penalize” or “function to prevent” a worker from looking for or taking a job from another company. This means that the FTC can go after employers who use clauses that the FTC thinks are functionally noncompetes. The FTC stated that the rule does not prevent most non-disclosure agreements and non-solicitation clauses for workers, there may be very broad or unfair versions of these kinds of agreements that could be prohibited by the new rule if they stop workers from getting a job or running a business.

“Senior executive.” The final rule also clarifies that the term "senior executive" refers to employees who earned more than $151,164 in the previous year and are in the "policy-making position." According to the final rule, the "policy-making position" includes a business's president, CEO, or counterpart, as well as any other business officer who has the power to make policy. It says that "policy-making authority" means having the final say on policies that affect important parts of a business or a common enterprise.

The Securities and Exchange Commission, however, defines "executive officer" more broadly than the FTC under Rule 3b-7 of the Securities Exchange Act of 1934. The final rule defines "policy-making authority" more closely than "policy-making function" under Rule 3b-7 and does not include "any vice president... in charge of a principal business unit, division, or function (such as sales, administration, or finance)." These definitions are open to interpretation, making the rule's suitability and implementation likely to be difficult.

Nonprofits. Another important area of uncertainty and potential challenge is whether or not the rule applies to groups that are nonprofits. The FTC agreed that the final rule does not apply to groups that are not covered by the FTC Act, creating a lack of jurisdiction for industries where nonprofit models are common. 

Implications of FTC Noncompete Ban on Dental Practices

Historically, dental practices have relied on noncompete agreements to protect proprietary methods and maintain patient lists. These agreements have often been essential in maintaining a competitive edge by preventing former employees from immediately joining or starting competing practices nearby. The FTC's ruling, branding these agreements as "unfair methods of competition," indicates a significant policy change, emphasizing worker mobility over traditional business protections.

The new rule applies to all employees, without exception, which is a major change from previous practices that often exempted senior executives. This widespread ban is intended to level the playing field, ensuring that all workers, regardless of their position, have the freedom to move between jobs without being hindered by previous agreements.

What Are the Next Steps?

Compliance Timeline

Companies have 120 days from the publication of the rule in the Federal Register, or until August 21, 2024, to comply. It is important for companies to start preparing to comply and review their employment contracts within this timeframe to avoid penalties and ensure smooth transitions.

Retention Beyond Noncompetes

If the new rule goes into effect as planned, business owners will be forced to find creative ways to prevent employees leaving and going to competitors. For example, the new rule does not prohibit “exclusivity agreements,” which require an associate to only work for one practice during the term of employment, or non-solicitation and confidentiality agreements, which all can be used to protect against unfair competition or conflicts of interest.  Be aware though that if the non-solicitation agreement is broad enough, it may be held to be a de facto noncompete and not enforceable. Business owners can also look at ways to enhance their work environments, benefits, paths for career advancement, etc. to keep valued team members from wanting to leave.

Stay Updated

Given the current uncertainty of the enforceability of the FTC noncompete ban, which may continue for a while as the courts decide the issues being brought to light, it is important for business owners to stay up-to-date on the status of the rule that could drastically change the employer/employee relationship in this country.

For further details on the FTC's Noncompete Rule, you can view the official document here. 

References: 

Federal Trade Commission. (2024). Noncompete Rule. Retrieved from https://www.ftc.gov/legal-library/browse/rules/noncompete-rule