Although non-competition agreements (NCAs) have been a staple in associate veterinarian employment agreements for a long time, there has been a recent trend in the industry to move away from the traditional geographic restrictive covenants. That trend may become the new normal because of a rule recently issued by the Federal Trade Commission (FTC). On April 23, 2024, the FTC by a 3-2 vote adopted a final rule that essentially bans all non-compete agreements arising from the employer/employee/independent contractor relationship.
This rule will cover almost all veterinary practices, clinics, and hospitals, unless the business is established as a not-for-profit entity. The rule prohibits any “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 does not prohibit “exclusivity agreements,” which require that an associate only work for one practice or that prohibit an associate from working for a competing practice during the term of employment. The rule also does not prohibit non-solicitation agreements or confidentiality agreements. However, if the non-solicitation agreement is too broad and essentially prohibits an employee from working in a specific geographic area, it may be determined to be a de facto NCA and will be unenforceable.
When does the non-compete rule go into effect?
The rule does not take effect until 120 days after it is officially published in the Federal Register. So, it may become effective sometime in September or early October 2024. However, there are already legal challenges to the rule questioning whether the FTC has the authority to enact a ban on NCAs, or if the Commission usurped Congresses’ legislative authority.
Specifically, the debate doesn’t revolve around the fairness of restrictive covenants or non-compete agreements, or whether they should be moderated to some degree. Instead, it’s about whether a governmental agency, answerable to the executive branch, possesses rule-making powers typically held by the legislative branch. While the majority contends that the FTC Act grants such authority from Congress to the executive branch, their argument hinges on outdated precedents, now challenged by recent opinions from the United States Supreme Court. Accordingly, there is a possibility that the courts will issue an injunction, which will stay the rule during the pendency of the lawsuits and add to enforcement complexities.
What impact will the rule have on existing non-compete agreements?
All NCAs between employers and employees will be void and unenforceable once the rule goes into effect. Consequently, any employer that entered into an NCA with a worker will be required to rescind that NCA prior to the effective date. If the rule becomes effective, employers will be required to provide written or electronic notice to current and former workers subject to an NCA informing them that:
- The NCA is no longer in effect and will not be enforced against the worker.
- The worker is free to seek employment with a competitor of the employer or operate a business that competes with the employer.
We recommend that for existing employees, the company provide an addendum to the employment agreement that voids the NCA.
Are there any exceptions to the rule?
There are two exceptions to the rule. The first exception permits an NCA in an employment agreement with a senior executive provided it was entered into before the ban’s effective date. Once that agreement terminates, even this senior executive cannot be required to enter into a successor agreement that includes a non-compete clause. However, the definition of “senior executive” is extremely narrow. In the rule, a senior executive is defined as a highly compensated person, earning at least $151,164 a year, who has final authority to make policy decisions on significant aspects of operating a business entity. In the veterinary industry, this is unlikely to apply to more than one person at a traditional hospital or clinic but may apply to more employees at a larger or corporate practice.
The second exception permits an NCA arising from or ancillary to the sale of a practice. If a veterinarian sells their practice, the buyer can negotiate the inclusion of a traditional geographic NCA in the purchase agreement.
What’s next?
The FTC’s rule is far from implementation—if it happens at all. In the meantime, both employers and employees are left in a state of uncertainty. If an injunction against the FTC’s rule is issued while the litigation is proceeding, the status quo will be maintained. However, until there is clarity from the courts, employers should identify all current and former employees subject to non-compete agreements and be prepared to issue the required notification should the rule become effective. Practices should also determine if any employees would fit within the definition of “senior executive.”
This current uncertainty may continue for a while, as the wheels of justice can move slowly. The courts may enforce the ban on NCAs, strike the ban on NCAs down, or permit a modified rule. Employers and employees should stay updated on the status of this rule, which could drastically alter the employer/employee relationship in the veterinary industry.
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