What the FTC’s New Noncompete Rule Means for Your Lab

The Federal Trade Commission (FTC) recently approved a rule banning most noncompete agreements nationwide, which is slated to go into effect on September 4, 2024. Such a ban will result in reduced healthcare costs, new business formations, increased innovation, and higher worker earnings, the FTC says.¹

For the lab industry specifically, noncompete agreements may have hindered worker mobility by prohibiting laboratory staff from leaving their current jobs to work for or with their employers’ competitors. Experts in staffing and recruiting are hopeful that the ban will help retain workers who might otherwise have left the industry due to this immobility, which is especially important given the continued staffing shortages plaguing laboratories. Here’s what laboratory leaders need to know about the new rule:^1,2

What agreements are actually banned, and who does the rule apply to?

As defined by the FTC, a noncompete clause “…functions to prevent a worker from:¹

(i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

(ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

According to research cited by the FTC, noncompetes hamper innovation and thwart entrepreneurial endeavors, especially by low-wage workers.³

The broad ban of noncompete agreements for all “workers” can include but is not limited to the following: “…employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”¹ This means that, whether your staff are W-2 employees, contractors, volunteers, or other types of workers, you can most likely no longer enforce existing noncompete agreements, and you cannot enter into new noncompete agreements with them or new hires in the future. There are a few exceptions, however.

What are the exceptions to the final rule?

The noncompete rule is fairly comprehensive, exempting only the following:^1,4

1. 1. Noncompete clauses as part of the sale of a business (i.e., between the seller and purchaser of the business).
   2. Noncompete clauses that are subject to pending litigation as of the effective date of the rule.
   3. Non-solicitation, nondisclosure agreements, and confidentiality clauses can remain in effect and can be executed in the future so long as they are allowed by local law and do not serve noncompete functions.
   4. Noncompetes that only restrict work or starting a business outside of the U.S.
   5. Noncompetes for franchisees in franchisee-franchisor relationships (although it is important to note that noncompete clauses would still be unlawful for workers of the franchisee).
   6. Non-profit organizations, as the FTC generally does not exercise jurisdiction over them.
   7. Existing noncompete agreements with “senior executives.”

Since a discussion of such “senior executives” makes up a large portion of the FTC’s description of the exemptions for the noncompete ban, it is important to note how the agency defines these individuals. The FTC notes that a senior executive has control over a significant aspect of the business entity without needing another person’s authority. Law firm Bass, Berry & Sims PLC concluded in a post on their website that such senior executives would typically be the president, CEO, or other policy-making official at the company, noting that the final rule also identifies senior executives as those earning more than $151,164 annually.⁴

Generally speaking, department heads at a company would not be categorized as senior executives, and neither would your sales and marketing teams, scientists and highly trained individuals, or your non-C-suite staff members, according to a recent webinar led by Danielle H. Tangorre and Leslie J. Levinson, partners at the law firm Robinson & Cole LLP. Tangorre and Levinson concluded that the FTC is attempting to limit the definition of senior executives to those in C-suite roles who have autonomous decision-making authority.⁵ It is important to note that new noncompete agreements cannot be executed after the effective date of the rule, even with senior executive team members.

Action items for laboratory leaders

Bass, Berry & Sims PLC encourages employers to take inventory of existing noncompete arrangements, noting whether these are with senior executives and/or whether to enter into such agreements with senior executives ahead of the final rule’s effective date. If there is an existing breach of a prior noncompete clause that you want to pursue legally, you will want to do so ahead of the rule becoming effective, as you will no longer be able to do so afterward.

Employees who had noncompete arrangements that will no longer be lawful under the new rule must be formally notified prior to the effective date of the final rule that their agreement will not be enforced. The FTC provides model language to use in these notifications. The individual must also be personally named, and the notification must be hand delivered, mailed, emailed, or texted. However, notification is not necessary if you don’t readily have any of these current contact methods for the affected individual available to you.¹

The future without noncompete agreements

The final rule may not be a done deal. There are currently two cases in Texas (Ryan, LLC, and a case brought by a Texas Chamber of Commerce)^6,7 and one in Pennsylvania (ATS Tree Services, LLC)⁸ challenging it, which could potentially delay its scheduled September 4 implementation. Most recently, the federal judge presiding over the Ryan case granted a preliminary injunction postponing the effective date of the rule, but only for the plaintiffs of that case. The court said it intends to make a final decision on the merits of the Ryan case “on or before August 30, 2024.”⁹

Despite any potential delays, given the FTC’s belief in the benefits of banning noncompetes, it’s likely that some version of the rule will ultimately be adopted. Staying up to date on the pending litigation cases and following the recommended action items in the section above will ensure you are in compliance no matter the outcome.

References:

1. 1. US Federal Trade Commission. “Noncompete rule” webpage. https://www.ftc.gov/legal-library/browse/rules/noncompete-rule. Accessed June 13, 2024
   2. US Federal Register. “Non-Compete Clause Rule.” https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule. Accessed June 13, 2024
   3. The University of Alabama in Huntsville via Newswise. “UAH researcher’s paper is cited in new FTC ruling banning noncompete agreements for entrepreneurs nationwide.” https://www.newswise.com/articles/view/810561/. Accessed June 13, 2024
   4. Cromwell, L., et al. Bass, Berry & Sims PLC HR Law Talk. “Scope and Impact of the FTC’s Non-Compete Rule for Employers.” https://www.bassberryhrlawtalk.com/ftc-non-compete-rule-employers/. Accessed June 13, 2024
   5. Tangorre, D. et al. Lighthouse Lab Services via BigMarker. “How the FTC’s Noncompete Ruling Stands to Impact Laboratories” webinar. https://www.bigmarker.com/lighthouse-lab-services/How-the-FTC-s-Noncompete-Ruling-Stands-to-Impact-Laboratories/.
   6. U.S. District Court, Northern District of Texas, Dallas Division. Ryan, LLC, v. Federal Trade Commission. https://www.uschamber.com/assets/documents/Brief-in-Support-Ryan-v.-FTC-N.D.-Tex.pdf
   7. U.S. District Court, Eastern District of Texas, Tyler Division. Chamber of Commerce of the United States of America et al. v. Federal Trade Commission and Lina Khan. https://www.uschamber.com/assets/documents/Chamber-v.-FTC-Motion-for-Stay-and-PI-filed.pdf
   8. U.S. District Court, Eastern District of Pennsylvania. ATS Tree Services, LLC v. Federal Trade Commission et al. https://pacificlegal.org/wp-content/uploads/2024/04/2024-04-2ATS-v-FTC-Complaint.pdf 
   9. U.S. District Court, Northern District of Texas, Dallas Division. Ryan, LLC, v. Federal Trade Commission. “Memorandum Opinion and Order.” https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rdJ9VqcU77pg/v0