FTC Noncompete Rule: Is My Noncompete Unenforceable?

On May 7, 2024, the Federal Trade Commission (FTC) published a final rule effectively banning the use of many non-competition clauses (the “Rule”).[1] The Rule will become effective on September 4, 2024 (“Effective Date”).[2]

Currently, non-competition clauses in employment agreements, as well as standalone non-competition agreements, are subject to varying degrees of enforceability depending on state law.[3] Given the FTC’s perceived failure of the existing “case-by-case and State-by-State approach,” the FTC introduced a proposed rule in January 2023 to proactively govern the enforceability of non-competition agreements at the federal level (the “Proposed Rule”).[4]

The FTC believes that implementation of the Rule will allow employees to pursue better employment opportunities, increase competition for workers, increase wages, and bolster entrepreneurship and innovation.[5] The FTC estimates the Rule will increase workers’ earnings in the aggregate between $400 billion and $488 billion per year.[6] In Georgia, specifically, the FTC estimates that 3 million workers will be covered by the Rule and experience an increase in total earnings of over $2 billion per year.[7]

The Rule requires employers to: (1) discontinue the use of non-competition agreements for certain workers, and (2) notify employees subject to existing non-competition agreements of their rescission and invalidity, where the existing non-competes do not qualify for one of the limited exceptions to the Rule (see below for more details).

  • The Rule effectuates this change by deeming it an “unfair method of competition”[8] for an employer to enter into or enforce a non-competition agreement with certain workers.[9] Worker is defined broadly to include employees, independent contractors, externs, volunteers, etc.[10]
  • In addition to the prohibition on new non-competition agreements, the Rule also requires employers to rescind existing non-competition agreements via notice to employees by the Effective Date.[11] The Rule prescribes a methodology for delivering the notice and provides model language.[12]

Under the Rule, a non-competition agreement means a standalone agreement or contractual term within a broader agreement (e.g., an employment agreement) that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting employment, or operating a business, after the conclusion of the worker’s employment with the employer.[13] The FTC intends this to be a functional test, applying not only to those contractual terms labeled “non-competition” within an agreement, but also to those terms that have the same effect as a non-competition agreement.[14]

The Rule has a few limited exceptions:

  • Senior executive exception: For senior executives, the Rule only prohibits entering into and enforcing non-competition agreements entered into after the Effective Date of the Rule.[15] Senior executive is generally defined as a worker in a policy-making position, including, for example, a president or CEO, who receives total annual compensation in excess of $151,164.[16]
  • Sale of a business exception: Non-competition agreements are permissible in conjunction with the sale of a business, of a person’s ownership interest in a business entity, or of all or substantially all of the assets of a business.[17] The sale of the business must be “bona fide,” meaning the transaction must not be entered into for the purpose of evading the Rule.[18]
  • Existing cause of action exception: The Rule also excepts enforcement of non-competition agreements after the Effective Date if the cause of action related to non-competition agreement accrued prior to the Effective Date.[19]

Additionally, the definition of non-competition agreement under the Rule  excludes other types of covenants restricting a worker’s post-employment actions like non-disclosure or non-solicitation agreements.[20] Further, the FTC’s rules do not apply to certain types of entities, including certain non-profits.[21] Accordingly, the Rule does not wholly prohibit the use of non-competition agreements in all scenarios.

The Rule is currently subject to litigation questioning its enforceability.[22] A decision is expected in early July.

Pending a decision regarding the Rule’s enforceability, employers must evaluate whether they are: (a) required to provide notice to employees and contractors subject to existing non-competition agreements of those agreements recission and invalidity; and (b) limit the use of non-competition agreements going forward.

If you have questions regarding your company’s non-competition agreements and the impact of the Rule on your business, please contact Andrew Hazen (ahazen@fh2.com; 770-771-6818) or Anne Marie Simoneaux (asimoneaux@fh2.com; 770-771-6811) or visit FH2.com to learn more about how the attorneys at Friend, Hudak & Harris can help.

____________________

[1] Non-Compete Clause Rule, 89 Fed. Reg. 38342, 38342–506 (May 7, 2024) [to be codified at 16 C.F.R. pt. 910] [hereinafter Final Rule]. The Final Rule is available at https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule.

[2] Final Rule at 38342.

[3] Non-Compete Clause Rule, 88 Fed. Reg. 3482, 3493–94 (Jan. 19, 2023) [hereinafter Proposed Rule]. The Proposed Rule is available at https://www.federalregister.gov/documents/2023/01/19/2023-00414/non-compete-clause-rule.

[4] Final Rule at 38343; Non-Compete Clause Rulemaking, FTC (Jan. 5, 2023), https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.

[5] Final Rule at 38433.

[6] Id.

[7] Id. at 38505.

[8] 16 C.F.R. § 910.2(a). Under the Federal Trade Commission Act, “unfair methods of competition” are unlawful. Final Rule at 38348. The Act gives the FTC authority to make regulations carrying out this provision, and the FTC cites this as its authority to define this new category of unfair competition. Id.

[9] 16 C.F.R. § 910.2(a).

[10] 16 C.F.R. § 910.1.

[11] 16 C.F.R. § 910.2(b).

[12]  Id.

[13] 16 C.F.R. § 910.1.

[14] Final Rule at 38361.

[15] 16 C.F.R. § 910.2(a)(2).

[16] 16 C.F.R. § 910.1.

[17] 16 C.F.R. § 910.3(a).

[18] Id. at 38438.

[19] 16 C.F.R. § 910.3(b).

[20] Final Rule at 38634.

[21] Final Rule at 38357.

[22] See Bryan Koenig, Chamber OK’d To Intervene Against FTC Noncompete Rule, Law360 (May 10, 2024), https://www.law360.com/articles/1835663/chamber-ok-d-to-intervene-against-ftc-noncompete-rule.

GEORGIA’S [POTENTIAL] CERTIFICATE OF NEED REFORM

Georgia’s Certificate of Need (“CON”) program,[i] administered by the Georgia Department of Community Health (“DCH”) Office of Health Planning, controls the creation and expansion of health facilities in Georgia.[ii] With the goals of measuring need, controlling costs, and guaranteeing access to healthcare, the CON program regulates most health care facilities in Georgia, including hospitals and long-term care facilities.[iii]

In recent years, states have begun enacting legislation repealing or limiting the applicability of CON laws.[iv] For example, in 2019, Florida amended its CON requirements for many types of health facilities to limit its regulation to nursing homes, hospices, and intermediate care facilities for the developmentally disabled.[v] Similarly, South Carolina repealed its CON requirements for most health facilities, notably excluding nursing homes.[vi]

Georgia followed suit with the Georgia General Assembly considering legislation to change the CON requirements during the 2023 legislative session.[vii] Critics of the CON program argued that it is outdated and stifles access to healthcare in rural areas.[viii] While no changes were made to the CON program during the 2023 legislative session, both the Senate and House created special study committees tasked with reviewing Georgia CON laws and recommending reform for the 2024 legislative session.[ix]

The Final Report of the Senate Certificate of Need Reform Study Committee recommended sweeping changes to Georgia’s CON program.[x] Finding that the CON laws prevented competition and limited advancement in health care delivery, particularly in rural communities, the Senate Committee proposed that the legislature fully repeal Georgia’s CON laws.[xi] And if not a full repeal, the Senate Committee recommended limiting the scope of the program by removing certain facility types and bed expansion from CON regulation and eliminating the cost thresholds.

Following the Senate Committee’s recommendation, the Senate will again consider legislation altering the CON requirements this legislative session. The Senate read and referred SB 442 on January 31, 2024, to the Senate Regulated Industries and Utilities committee.[xii] The bill repeals all existing CON requirements for any new or existing health care facilities in counties with a population of less than 35,000.[xiii] Also, on January 8, 2024, the Senate recommitted last year’s proposed legislation addressing CON reform, SB 162, to the same committee.[xiv] The current version of SB 162 limits the certificate of need program to a narrower set of health care facilities, including skilled nursing facilities, intermediate care facilities, personal care homes, and home health agencies.[xv]

FH2’s corporate team will continue to monitor proposed CON legislation and other Certificate of Need developments in Georgia and is available to assist healthcare providers with Certificate of Need questions and issues, including how these changes may impact both operations and asset transfers and sales for healthcare providers in Georgia. If you have questions regarding Georgia’s Certificate of Need reform and its potential impacts on your business, please contact Andrew Hazen (ahazen@fh2.com; 770-771-6818) or Anne Marie Simoneaux (asimoneaux@fh2.com; 770-771-6811) or visit fh2.com to learn more about how the attorneys at Friend, Hudak & Harris, LLP can help.

_________________

[i] See O.C.G.A. § 31-6-40 to 31-6-50; Ga. Comp. R. & Regs. § 111-2-2.

[ii] Certificate of Need (CON), Ga. Dep’t of Cmty. Health, https://dch.georgia.gov/divisionsoffices/office-health-planning/certificate-need-con (last visited Jan. 31, 2024).

[iii] See Certificate of Need (CON), supra note ii; O.C.G.A.§ 31-6-2(17).

[iv] See, e.g., Certificate of Need State Laws, Nat’l Conference of State legislatures (Jan. 1, 2023), https://www.ncsl.org/health/certificate-of-need-state-laws.

[v] See Certificate of Need State Laws, supra note iv; Hedy Silver Rubinger & Charmain A. Mech, No Need for Certificate of Need: Florida Eliminates Certificate of Need Review for Specialty Hospitals, Arnall Golden Gregory (June 22, 2021), https://www.agg.com/news-insights/publications/no-need-for-certificate-of-need-florida-eliminates-certificate-of-need-review-for-specialty-hospitals/.

[vi] Partial Repeal of Certificate of Need (CON) Program, S.C. Dep’t of Health and Envtl. Control (June 8, 2023), https://scdhec.gov/sites/default/files/media/document/CON-DHEC-Board-Presentation-Jun-8-2023.pdf.

[vii] See SB 162, Ga. Gen. Assembly, https://www.legis.ga.gov/legislation/64324 (last visited Feb. 7, 2024); SB 99, Ga. Gen. Assembly, https://www.legis.ga.gov/legislation/64040 (last visited Jan. 31, 2024).

[viii] See, e.g., Donovan J. Thomas, Georgia Laws for Opening or Expanding Hospitals Getting Review by State Senate, AJC (June 13, 2023), https://www.ajc.com/news/health-news/georgia-laws-for-opening-or-expanding-hospitals-getting-review-by-state-senate/N7QEGENJRNFCLBQNFSHLFBSMXU/; Greg Bluestein, Ariel Hart & Zachary Hansen, A Burt Jones-backed Hospital Overhaul Draws Scrutiny, AJC (Mar. 20, 2023), https://www.ajc.com/politics/burt-jones-family-could-benefit-from-new-hospital-overhaul/V6FQ67MLBNAHJNL7YPDOZ6SEBQ/.

[ix] See SR 279, Ga. Gen. Assembly, https://www.legis.ga.gov/legislation/65179 (last visited Jan. 31, 2024); HR 603, Ga. Gen. Assembly, https://www.legis.ga.gov/legislation/65620 (last visited Jan. 31, 2024).

[x] Final Report of the Senate Certificate of Need Reform Study Committee (SR 279), Ga. State Senate Office of Policy & legislative Analysis, 14 (Nov. 29, 2023), https://www.senate.ga.gov/committees/Documents/CONFinalReport11.29.23.pdf [hereinafter Senate Committee Final Report]. Note that the House report did not specify any recommendations. See Final Report: House of Representatives Study Committee on Certificate of Need Modernization, House Budget & Research Office (Dec. 11, 2023), https://www.house.ga.gov/Documents/CommitteeDocuments/2023/Certificate_of_Need/HR_603_Final_Report_w_signatures_12.11.23.pdf.

[xi] Senate Committee Final Report, supra note x, at 14.

[xii] SB 442, Ga. Gen. Assembly, https://www.legis.ga.gov/legislation/66565 (last visited Feb. 7, 2024); Senate First Readers: Thirteenth Legislative Day, Ga. Gen. Assembly, 4 (Jan. 31, 2024), https://www.legis.ga.gov/api/document/docs/default-source/senate-calendars/20232024/first-readers-2024-ld13.pdf?sfvrsn=b7d427d4_2.

[xiii] SB 442 (as introduced LC 33 9624), Ga. Gen. Assembly, 1–2, https://www.legis.ga.gov/legislation/66565 (select “Current Version”) (last visited Feb. 7, 2024).

[xiv] See also SB 162, supra note vii.

[xv] SB 162 (as introduced LC 33 9350), Ga. Gen. Assembly, 6, https://www.legis.ga.gov/legislation/64324 (select “Current Version”) (last visited Feb. 7, 2024)