Noncomplete clauses in workplace employment contracts, as the name implies, are designed to prevent workers who leave that place of employment from competing against them in the marketplace, usually for a specified amount of time. A clause might, for example, ban the employee from working at a similar business within a defined geographic area or prevent them from starting a competing business for a certain time period.
For context, the vast majority (95 percent) of written veterinarian contracts in clinical practices, in states that allow them, currently contain a noncompete clause—and this is true in both private and corporate practices. Noncompete clauses are more unusual in contracts for technicians and other team members in veterinary practices.
Nuts and Bolts of the Ban—and a Clash
The Federal Trade Commission (FTC) has taken a stand that noncomplete clauses harm workers and, after a year-long review of public comments, on April 24, 2024, the FTC issued a final rule that prohibits employers from making or enforcing noncompete provisions for the majority of employees. This would become effective 120 days from when it is published in the Federal Register. This means that, after this date, most existing noncompete clauses would no longer be enforceable, and this final rule would impact thirty million employees, which is nearly one out of every five working Americans. Among them, as noted above, would be many veterinarians in clinical practices.
An exception to the FTC rule would be as follows: already-existing noncompete agreements for senior executives with policy making authority can remain in force, post-FTC-ruling, but employers may not enter into or attempt to enforce any new noncompete clauses even when they involve senior executives. A senior executive is defined as one who will earn at least $151,164 annually with a policy making position being ones like a company’s president, chief executive officer, or other person who has their level of policy making authority. This exception MAY apply to Medical Directors in certain circumstances, it typically will not apply to most associate veterinarians.
Another exception to the final rule is when a noncompete clause exists because of a business entity sale. Additionally, this final rule does not affect trade secret laws or nondisclosure agreements.
Employers would be required to notify all employees (both current and former) with noncompete provisions that these are no longer enforceable. Although the proposed rule originally required employees to formally rescind noncompete notices, the final rule considers notification to be sufficient.
With that said, legal challenges already exist in federal court, including by the U.S. Chamber of Commerce in East Texas and by tax firm Ryan LLC in Dallas. Plus, business groups have already joined the Chamber of Commerce in its lawsuit; this includes Business Roundtable, an organization that represents chief executive officers (CEOs) at some of the largest employers in the country.
FTC Position
One of the questions that will almost surely be considered in court is whether the FTC has the authority to make such a broad ruling. For context, here is the FTC mission: To prevent business practices that are anticompetitive or deceptive or unfair to consumers; to enhance informed consumer choice and public understanding of the competitive process; and to accomplish this without unduly burdening legitimate business activity.
In response to the opposition it’s receiving, the FTC states that its legal authority on the matter is “crystal-clear,” believing that this final rule falls in the “very heart of our mandate” and will allow workers to pursue better pay and benefits.
As far as any legal challenges (with the current ones being described next), the FTC plans to move ahead as if the effective date will be honored—unless their final rule is, in fact, overturned by a court.
Business Perspectives
Businesses may sometimes use noncompete agreements to address other issues such prohibiting former employees from directly approaching the former workplaces’ clients or protecting their intellectual property. While nondisclosure agreements can provide protections against the sharing of trade secrets, a spokesperson from Ryan LLC said that they don’t offer the same degree of guardrails as noncompete clauses. The spokesperson also said that, if a company believes that an employee violated their nondisclosure clause, the burden of investigating is on the company itself, and then they would need to take the matter to court. Ryan LLC also uses noncompete clauses to protect their proprietary training procedures.
The Chamber of Commerce posits that, for decades, courts and policymakers have acknowledged the value of noncompete agreements without the federal government ever regulating them.
The Chamber also made a state’s rights kind of argument, noting how several of them have placed restrictions on the clauses. Therefore, the Chamber says, because the FTC did not have Congressional authorization to override these state laws, the FTC ban is not enforceable.
To date, California, Oklahoma, North Dakota, and Minnesota have fully banned them. As an example of states where they’re legal with some restrictions, Massachusetts has banned these agreements for the following professions: nurses, doctors, social workers, psychologists, lawyers, and broadcast industry workers. Texas allows them, but they must be for employees given specialized training or ones that have access to confidential data.
Other states are working through this type of legislation. For example, although New York’s governor has recently vetoed a noncompete agreement ban, she did indicate that she would support one that included a carve out that allowed them to be in contracts for high earners. The House of Representatives in Pennsylvania has passed a bill that prohibits noncompete clauses for healthcare practitioners although that is not yet a law.
Both lawsuits—from the Chamber and from Ryan LLC—were filed in conservative judicial districts that tend to rule against instances in which they determine federal overreach exists.
What to Do Now
Although the stated date of compliance (120 days after Federal Register publication) would trigger its effective date on September 4th, it’s likely that litigants will seek and probably receive a preliminary injunction that will prevent the rule from going into effect as the case is pending in court. This will almost certainly take months and, if it ends up before the Supreme Court, it could take years. The current composition of the Supreme Court makes it probable that the justices will invalidate the rule, saying that it was beyond FTC’s authority. The Court’s major questions doctrine holds that Congress must decide federal matters of major significance rather than agencies like the FTC.
It can make sense for veterinary practices to review contracts of employees to see if there are ways to protect the practice should the ruling stand, have a sense of how this rule, if allowed to stand, would impact your practice. That said, as of now, the noncompete agreements are still valid and we recommend pausing as we wait for things to develop. Then, if the final rule is upheld at some point, we will publish a letter to use as notification to past and present employees that the noncompete clause in their contracts is no longer being enforced.
