On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to issue a final rule that would virtually ban all non-compete agreements, for nearly all employees in a dental practice. The final rule is scheduled to become effective 120 days after publication in the Federal Register.
Existing Non-Competes – Careful
The final rule distinguishes between new non-compete agreements and existing non-compete agreements. Specifically, the final rule essentially bans new non-compete agreements for virtually all dental practice employees, including employees in the practice who are considered senior executives, after the effective date of the final rule.
The final rule provides that it is an unfair method of competition and therefore a violation of Section 5 of the FTC Act, for employers to enter into or enforce a non-compete agreement with any employee, after the effective date of the final rule.
Practice owners are prohibited from representing that an employee is subject to a non-compete agreement after the effective date of the final rule.
For existing non-compete agreements, the final rule adopts a different approach for senior executives within a practice as compared to other employees. For senior executives (as outlined below), existing non-compete agreements may remain in effect.
However, existing non-compete agreements for employees other than senior executives are not enforceable after the effective date of the final rule.
The final rule defines the term “senior executive” as employees who earn more than $151,164 per year, and who have decision making authority. In addition, a senior executive must have control of a significant aspect of a particular business entity. The definition as senior executive will vary significantly from practice to practice.
Notice requirements regarding existing non-compete agreements
Under the final rule, practice owners must provide “clear and conspicuous” notice by the effective date to employees within the practice: (1) who are bound by an existing non-compete agreement; and (2) who are not considered senior executives, thereby advising the employee that their non-compete agreement will not be and cannot legally be enforced against them in the future.
The notice can be delivered by various methods, including:
(1) by hand to the worker;
(2) by mail at the employees last known personal street address;
(3) by email at an email address belonging to the employee, including the employees current work email address or last known personal email address; or
(4) by text message at a mobile telephone number that belongs to the employee.
Sale of business exception
The final rule does recognize an exception to non-compete agreements that are entered into as a result of a “bona fide” sale of a business, which would include the sale of a dental practice. However, the “bona fide” sale (transaction) must be in good faith, instead of a transaction (sale) that is made in order to avoid the non-compete rule.
The final rule eliminates the 25 percent ownership threshold that appeared in the previous proposed rule. In other words, non-compete agreements entered into in a “bona fide” sale of a business (dental practice), even with individuals who own less than 25% of a practice, will remain viable.
State non-compete laws
The final rule clarifies that state laws that restrict non-compete agreements, and do not conflict with the final rule, are not preempted.
According to the final rule, states may continue to enforce state laws that restrict non-compete agreements that are not in conflict with the final rule, even if the scope of the state restriction is narrower than that of the final rule. In addition, employers must continue to comply with both the FTC’s final rule and applicable state non-compete law.
If the FTC ban is upheld, Georgia’s non-compete law could be dramatically affected, but only time will tell.
Summary: Legal challenges
It should be noted that the final rule may rest on questionable legal authority.
We expect that the final rule will face immediate legal challenges under the Administrative Procedure Act by affected businesses, as well as various trade associations.
At this point and time, we are recommending that practice owners and associates wait and see how the legal challenges will proceed over the next few weeks.
The FTC final rule is very complex, and this particular article only outlines some specific provisions of the final rule.
We will continue to monitor the developments relating to the final rule.
If you have any questions or if you would like to have your noncompete agreement reviewed, we are here to help.
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