Death Knell For Non-Competes? FTC Announces New Proposed Rule That Would Ban Them Once and For All.
For decades, businesses of all stripes and across all industries and professions – including dental practices - have used non-competition agreements to limit the ability of former employees to go head-to-head against their former employers. For just as long, courts and state legislatures across the country have struggled to define the acceptable scope of such provisions. They have looked at these contractual arrangements with increasing skepticism insofar as they infringe on foundational principles of fair competition and the right of individuals to make a living in their chosen occupation or profession. Soon, however, the uncertainty and lack of clarity regarding the validity and enforceability of non-competes may be a thing of the past.
On January 5, 2023, the U.S. Federal Trade Commission (FTC) announced a new proposed rule that would effectively ban all future and existing non-competition agreements. The rule would deem non-competes an “unfair method of competition” and thus prohibited under Section 5 of the Federal Trade Commission Act. If finalized in its current form, the proposed rule would generally prohibit all employers from using non-compete clauses. Specifically, the rule would make it illegal for an employer to:
- enter into or attempt to enter into a non-competition agreement with a worker;
- maintain a non-competition agreement with a worker; or
- represent to a worker, under certain circumstances, that the worker is subject to a non-competition agreement.
Rule Would Apply To All Workers, Including Independent Contractors
The proposed all-encompassing ban on non-competes covers all types of workers regardless of their employment classification and whether they are paid or unpaid. The rule “would clarify that the term ‘worker’ includes an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”
Non-Solicitation and Non-Disclosure Agreements Not Implicated
People often use the term “non-compete” interchangeably for three related but distinct limitations on future business and employment activities. But non-competition provisions are very different from non-solicitation and non-disclosure clauses, and the rule would treat them as such.
The proposed rule defines a “non-compete clause” as “a 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 clarifies that the definition of a non-compete clause “would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements—because these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.”
However, the rule provides that a provision that purports to be something other than a non-compete could be deemed to be one, and thus prohibited, “where they are so unusually broad in scope that they function as such.” Accordingly, “whether a contractual provision is a non-compete clause would depend not on what the provision is called, but how the provision functions.”
Employer Obligations Regarding Existing Non-Competes
As noted, the proposed rule would render all existing non-competes void and unenforceable and require employers to rescind existing non-competes no later than the rule’s compliance date, which has yet to be determined. Additionally, employers will need to provide each employee subject to an existing non-compete with notice that it has been rescinded and may not be enforced against the worker. Specifically, the employer would need to:
- provide the notice to the worker in an individualized communication;
- provide the notice on paper or in a digital format such as, for example, an email or text message;
- provide the notice to the worker within 45 days of rescinding the non-compete clause; and
- provide the notice to workers who currently work for the employer and those who formerly worked for the employer if the employer has the worker’s contact information readily available.
The proposed rule contains model language for the required rescission notice.
Exception for Non-Competes Related to Purchase and Sale of a Business
One notable exception to the proposed ban on non-competes involves those entered into as part of the purchase or sale of a business. Specifically, the rule provides that it shall not apply to:
a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.
It is unclear what the rule will look like in its final form and when it will become effective. What is clear is that the end appears to be near for non-competes, and dental practice owners should be prepared for that likelihood.
If you have questions or concerns about the FTC’s proposed rule, please call Grogan Hesse & Uditsky at (630) 833-5533 or contact us online to arrange for your free initial consultation.
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