The Federal Trade Commission (the “FTC”) issued a final rule (the “Rule”) that prohibits existing and future noncompetition provisions for all workers, except that pre-Effective Date (defined below) noncompetition provisions for workers who are “Senior Executives” are grandfathered. A worker constitutes a Senior Executives if he or she earns at least $151,164 per annum (including salary, bonus and commissions) and is in a “policy making position.” How this definition applies will be hotly litigated for years to come. What the Rule does make clear is that a Senior Executive includes a President, CEO or equivalent, or any other person with “policy-making authority” for significant aspects of a business entity or common enterprise. The Rule will, absent a judicially imposed stay, become effective within 120 days from the date of its publication (the “Effective Date”).
The Rule does not prohibit noncompetition provisions in the context of a sale of a business (including partner buyouts and mergers and acquisitions), under certain conditions, or to an employer that is a non-profit entity. The Rule also does not prohibit non-solicitation provisions unless they effectively prevent a worker from seeking or accepting other work or starting a business after their employment ends, which is a fact-sensitive analysis that we believe will be the subject of substantial litigation.
To comply with the Rule, affected entities must, prior to the Effective Date, among other things, amend their relevant agreements with their workers/owners to eliminate offensive noncompetition or similar provisions. Also, employers, who desire to subject their “Senior Executives” to a noncompetition provision, must enter into or modify their contracts with such executives prior to the Effective Date.
Although it is conceivable that anticipated legal challenges may delay the implementation of or even affect the requirements of the Rule, it would be prudent for employers to promptly consult with legal counsel regarding compliance with the Rule. Additionally, because healthcare employers heavily rely on noncompetition provisions to protect their goodwill, it is important to explore ways to prevent the potential significant loss of goodwill that may result from the noncompete ban.
