aUPDATE: Since this conversation took place, the FTC ban was published in the Federal Register with an effective date of September 4, 2024 (legal challenges to the ruling may affect this date). Stay tuned for further updates.
The opinions expressed by the individual participants are solely their own as of the time of recording and should not be construed as legal advice.
This transcript has been edited for clarity.
Trey Cutler, JD, is the founder of Cutler Law Firm in San Luis Obispo, California. He earned his JD from University of Texas, Austin, and is a member of the bar in Colorado and Texas. Trey practices business law, with a primary focus on veterinary practice and is a past president of VetPartners and a member of the American Veterinary Medical Law Association.
KB: If someone hasn't been paying close attention, what are we talking about and why does it matter?
TC: On April 23, 2024, the Federal Trade Commission (FTC) announced after a long delay that they are banning noncompete clauses (see What is a noncompete clause?). The ban is not effective yet, but is set to become effective after it is published, which we'll talk about later on.
Get the basics: What Veterinarians Should Know
This is huge news, and it’s rare in the area of business law to see such a sweeping change. This is impactful for all businesses, especially veterinary practices.
In a typical veterinary practice, value is not in the stuff (eg, inventory, equipment), but in something intangible (eg, clients). Historically, practice owners have tried to protect that value by having associate veterinarians sign a noncompete (in most states). Sometimes they did that well and fairly, and sometimes they overreached.
What is a noncompete clause?
A noncompete clause (ie, a noncompete) is a section of an agreement that restricts employees of a practice from leaving and taking a position at a practice considered to be a competitor. Restraints typically include a geographic area and a time period. Occasionally, the restraint might be client-specific or preclude a particular specialty in veterinary medicine.
KB: I think many people are wondering, “What does this mean for me and my contract now?” Does it change or nullify any current contracts or clauses within those contracts, or do we have to wait until something else happens?
TC: As it stands right now, the ban will nullify all existing noncompetes, except for a group that the rule refers to as senior executives, once it goes into effect. In addition, all future noncompetes will be banned, even for senior executives. In other words, there will be no new employee noncompetes permitted at any level under the new FTC rule from the time it becomes effective.
It’s important to keep in mind that even though this ruling has been announced, and we know the rules are going to change, if anyone jumps the gun and violates their noncompete before the rule has gone into effect, their practice will have a valid cause of action for any violation of the noncompete that occurred prior to the ban becoming effective.
Practice owners should be aware that not only does the new rule take away noncompetes for associate veterinarians, they are also obligated under the new rule to give written notice stating the noncompete portion of the contract will not be enforced to anyone subject to a noncompete before the date the rule becomes effective.
KB: So, when this takes effect, companies will be required to tell employees the noncompete clause is void. Will they be required to rewrite contracts?
TC: I think in the FTC’s original proposal, they suggested employers would have to amend contracts, but in the final rule, they took the position that employers will not have to do so. Employers, however, will have to communicate in writing that noncompete clauses will not be enforced.
People often put all noncompetes in one category, but there are different types. The FTC rule makes clear that although noncompetes for employees are the target of this ruling, noncompetes in the context of a bona fide sale of a business (eg, veterinary practice, ownership interest in a business) are okay and not targeted by this ban.
KB: In the meantime, what might delay or prevent this ban from going into effect the way it's written?
TC: At this point, we don't know what that effective date will be, but we should know soon. The rule won’t go into effect until 120 days after being published in the Federal Register, and only if legislation isn’t successful in blocking the ban.
In less than 24 hours, the US Chamber of Commerce filed a lawsuit trying to block the ruling, and I wouldn’t be surprised if others haven’t already been filed as well. It will be heartily challenged, and it'll be interesting to see how it plays out.
Before the rule is published, someone may try to get a court to issue an injunction that the FTC overstepped their bounds and the rule can't go into effect. This is technically possible but unlikely. It would be surprising if a court issued an order and blocked this from becoming effective at all. The courts may not be of the same mind. The FTC itself wasn't unified in this: the vote was 3 to 2 to approve the ban.
Absent an administration change, I expect the FTC will do everything in its power to enforce the new rule until there's a final decision that sets the issue entirely to rest; however, it will likely take years. The question in the meantime is whether the FTC will be forced to wait on implementation while issues are litigated.
KB: I’d like to ask about the senior executive exemption you mentioned. It was described in the ruling as affecting those who make at least $151,000 per year and have policymaking capabilities in their organization. What about, say, a specialist who is making significantly over $150,000 per year and may make decisions at that organization, but they are only an employee of the organization, not an executive?
TC: For any new contracts, there can’t be a noncompete at all under the FTC’s new rule. This only comes up with existing contracts. There's a 2-pronged test to determine who qualifies as a senior executive in this context. One is the salary component, which is at least $151,164. The other is policymaking authority. It describes senior executives as CEOs, presidents, other executive officers, and other people with similar policymaking authority. I don’t think specialists would apply; they may have a lot of status on the medical side of practice and raise the level of policies in the practice, but I don't think that's what the FTC is getting at.
A circumstance closer to that definition would be a medical director, who is usually part of the senior management team at a veterinary hospital. Arguably, it's a gray area, and some employers may take the position that a medical director is a senior executive.
KB: Regardless of if and when this ban goes into effect, do you feel this decision will affect veterinary contract negotiations going forward?
TC: From my perspective, even before this ban was proposed, we could see changes happening around this issue. I think the general attitude of the public toward noncompetes was swinging. Minnesota adopted a ban. One factor causing the swing in this context is corporatization. There are more and more people working for corporations, which have historically routinely asked for noncompetes.
I think the biggest reason for what's been going on in the space is that veterinarians are scarce. The high demand for veterinarians has led to many practice owners saying, “I don't want to lose this vet because of this issue. I'm willing to take the risk of not having a noncompete.” The more practice owners who make that decision, the harder it is for other owners to keep requiring noncompetes.
KB: Let’s say, for example, I left a job 1 year ago and had a 2-year noncompete, and this ban goes into effect in 4 months. Even though I'm no longer employed at that practice, the noncompete I'm still under would be void at that point. Correct?
TC: That is correct. That’s what I would call a tail of a noncompete. The FTC ban would result in there being no restrictions posttermination of employment, unless you were a senior executive.
KB: Because of what happened with student loan forgiveness, I think many veterinarians have lost trust in these sweeping decisions that seem so exciting. They feel this optimism, that turns out not to be what they were expecting. What's the difference between that and this? Can associates be reasonably more hopeful that this will actually happen?
TC: It will be 120 days after this gets published in the Federal Register that the ban goes into effect. Even if it is later taken away by the courts, I think the pendulum has swung so far that the FTC ban will still have a meaningful impact. Other states could follow what we've seen in a few states so far, either significantly restricting noncompetes or banning them entirely. With the public’s view on noncompetes, I don't see this pendulum swinging back the other direction any time soon. So, if you're on the associate side, you have reason to be hopeful.
KB: Employers still have recourse if they're worried about somebody taking trade secret information, right? Nonsolicitation and nondisclosure agreements are still legal.
TC: Right. There can be nonsolicitation, nondisclosure, noninterference covenants; however, I think the best protection for any employer is to provide a great place to work. If practice is where people want to be, clients and staff will keep coming. People are always going to come and go, and some will compete, but over the long haul, the practice will be fine. That's exactly what's happened in states like California, where there are many outrageously successful practices, notwithstanding the inability to use noncompetes.
Learn more about the FTC ban: FTC Votes to Ban Noncompetes: What Veterinarians Should Know
From Our Archives: Navigating Noncompete Clauses in Veterinary Medicine
Know the Law: Veterinary Noncompete Agreements