Q&As on the FTC’s Non-Compete Ban
What happened?
The FTC announced a ban on employee non-competes in the U.S. on April 23, 2024.
This was a very significant and controversial decision that followed a lengthy proposal and comment process. There were over 26,000 comments on the proposed rule. The final vote of the FTC commissioners approving the ban was 3-2.
The impact of this ban is especially relevant for businesses like veterinary practices where typically over 90% of the business value is ‘goodwill.’ In the past, practice owners could protect that goodwill with associate non-competes in most states, as long as they were reasonable in scope. Now, can’t do that at all going forward.
What is the immediate impact of the FTC new rule?
The new rule will nullify all existing non-competes, except for those with ‘senior executives.’ A ‘senior executive’ is a CEO, President or other executive officer or someone with that kind of policy-making authority who makes over $151,164 per year.
It also will prohibit any new employee non-competes going forward, including non-competes with senior executives.
The new rule does not ban non-competes related to a bona fide sale of a business or sale of an ownership interest in a business.
When will the FTC’s ban on employment non-competes go into effect?
The ban will go into effect 120 days after the rule is published in the Federal Register. No further regulatory or legislative action will be required. It is possible that a court could issue an injunction blocking the rule from going into effect prior to that point, although that would be a little surprising.
Are there any steps that should be taken (or avoided) during the current period before the rule takes effect?
The new rule requires employers to provide written notice to any employee with a non-compete that their non-competes will not be enforced. This notice is to be delivered prior to the rule becoming effective. As originally proposed, employers would have been required to amend their contracts to remove the banned non-competes, but the FTC opted to adopt a written notice requirement instead in the final rule.
The new rule does not immediately ban non-competes and it makes it clear that any cause of action related to the violation of a non-compete that occurs prior the ban is still a valid cause of action after the ban becomes effective.
So, the important note for employees is – Don’t jump the gun! In other words, don’t violate any non-compete before it becomes unenforceable on the effective date of the new rule.
Is the FTC Rule likely to get stuck down?
Only time will tell, but court challenges are inevitable and have already begun. As an example, the U.S. Chamber of Commerce filed suit challenging the rule within 24 hours of the FTC’s announcement. The resulting litigation will likely take a while to sort itself out to an ultimate conclusion.
Are there other legal protections that help practice owners protect the goodwill of their businesses in the absence of non-competes?
There are definitely other legal protections that make sense in this type of situation. For example, while a non-compete may not be enforceable, a well-drafted non-solicitation covenant and confidentiality provision often will be an enforceable means of providing some protection of a business’s goodwill.