Non-Competes No More? What Dental Practice Owners Need To Know About The FTC’s Recent Ruling
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. Over the past decade or so, however, there has been a concerted effort at the state and federal levels to either prohibit or significantly limit the use of such provisions. Those efforts have culminated with the U.S. Federal Trade Commission’s April 23, 2024 approval of a Final Rule that effectively bans all non-competes, except those for “senior executives” or related to the sale of a business.
The ban was met with stiff resistance from the business community when the FTC first proposed it in January 2023, and, indeed, a federal lawsuit challenging the validity of the Final Rule was filed by the U.S. Chamber of Commerce and others within hours of its approval. Short of judicial intervention, the rule will become effective 120 days after its publication in the Federal Register.
Accordingly, practice owners who currently use such agreements or provisions to protect their business interests need to prepare for a post-non-compete world and understand exactly what the new rule prohibits, and what it still allows.
What Does The Final Rule Prohibit?
With the two notable exceptions discussed below, the Final Rule renders all existing "non-compete clauses" null and void and forbids their use in the future. As defined in the rule, a prohibited “non-compete clause” is "a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
- Operating a business in the United States after the conclusion of the employment that includes the term or condition."
For purposes of the Final Rule, "term or condition of employment" includes, but is not limited to, a contractual term or workplace policy, whether written or oral.
Non-Disclosure and Non-Solicitation Provisions Are Fine – As Long As They Don’t Act As a Non-Compete
Non-disclosure or non-solicitation clauses and agreements are still permitted and enforceable under the Final Rule, so long they do not act as a non-compete as a practical matter. If any such agreement effectively "prohibits," "penalizes," or "functions to prevent a worker from" seeking or accepting work after the end of their employment, it may be deemed to be a prohibited non-compete. The FTC states that whether any given provision constitutes a "non-compete clause" is a "fact-specific inquiry."
All Workers Other Than “Senior Executives” Are Covered by the Non-Compete Ban
Other than "senior executives," as discussed below, the rule bans all non-competes for employees, independent contractors, externs, interns, volunteers, apprentices, sole proprietors who provide a service to a person, and a person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.
Ban Does Not Apply to "Senior Executives" or if Connected to the Sale of a Business
One significant change between the proposed and final rules is that the final version does not void any existing non-competes involving "senior executives." However, it prohibits employers from entering into or enforcing new non-competes with senior executives after the Final Rule's effective date.
A "senior executive" is defined as a worker in a "policy-making position" who earns an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments). A "policy-making position" means a business entity's president, chief executive officer, or the equivalent, any other officer with policy-making authority, or any other person with policy-making authority for the business, similar to an officer with policy-making authority.
Importantly, for dentists who are considering purchasing or selling their practice, the Final Rule does not apply to a non-compete clause entered into by a person selling their ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. Buyers of a dental practice can therefore still use reasonable non-compete provisions to limit the seller’s activities after the consummation of the transaction.
Employers Must Notify Workers That Their Non-Compete Is No Longer Enforceable
The proposed rule would have required employers to legally modify existing non-competes by formally rescinding them. The Final Rule streamlines these obligations, and employers must now simply notify any worker subject to a non-compete that it will not be enforced against them in the future. To aid employers' compliance with this requirement, the FTC included model language in the final rule that employers can use to communicate with workers.
Regardless of the rule's ultimate fate in pending litigation, dental practice owners who rely on non-competition provisions to protect their business interests should engage counsel to review any non-competition language in their employment agreements and consider other options for protecting trade secrets and confidential information.
If you have questions or concerns about the FTC’s Final Rule, or if you need a review of your employment agreements, please call Grogan Hesse & Uditsky at (630) 833-5533 or contact us online to arrange for your free initial consultation.
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