The U.S. Supreme Court yesterday heard final arguments on whether Idaho’s restrictive abortion ban violates a federal law, The New York times reports. Idaho’s ban allows life-saving abortions for pregnant women, but not to prevent other health complications. The federal government maintains the case could allow states to pursue future restrictions on emergency care, and that it violates the Emergency Medical Treatment and Labor Act (EMTLA). Justice Samuel A. Alito Jr. rejected this conclusion, adding saying that EMTALA's references to an “unborn child” suggests a hospital must try to eliminate any immediate threat to the child and that “performing an abortion is antithetical to that duty.” A decision is expected in June.

The Tennessee House of Representative yesterday passed legislation to alter the state’s hospital certificate of need (CON) law, further mandating the Health Facilities Commission study the impact of CON reform and facilities licensure in the state. A key change includes removal of restrictions on satellite emergency rooms in counties with an existing hospital. The Tennessee Hospital Association has long opposed such changes, maintaining the law benefits nonprofit hospitals by limiting competition and increasing revenue to offset the cost of charity care. Corporations like HCA are proponents of reform as it would allow them to open more satellite emergency rooms and makes it easier to build hospitals in counties where none exist. The Tennessee Lookout has more.

On April 23, the Federal Trade Commission (FTC) issued its final rule effectively banning most contractual noncompete provisions in the United States as applied to individual workers.[1] While the ban, assuming it survives legal challenges, will certainly trigger seismic shifts in the employment law arena (particularly with respect to drafting and negotiating employment-related contracts), M&A practitioners — or at least their starting-point purchase agreement templates — seem to have avoided the wrath of the sweeping changes.

The Non-Compete Clause Rule[2] (the rule) generally prohibits non-compete agreements applicable to “workers” other than “senior executives” (as defined in the rule) who, among other defining characteristics, are “natural persons.” The rule, via explicit language or omission, includes several exceptions to the prohibition, including omitting from the definitions of “worker” (x) natural persons who are franchisees in a franchisee-franchisor relationship (via an explicit definitional carveout) and (y) independent contractors who may engage in their 1099 activities via through a legal entity that contracts with the party seeking to enforce a non-compete (though enforcement in such a scenario would arguably only be permissible against the contracting legal entity and not any of its individual owners).

The exception of particular note to business lawyers is the “sale of business” exception to the general non-compete ban, described in Section 910.3(a) of the rule (sale exception). The sale exception provides (emphasis added):

“(a)      The requirements of this part 910 [i.e., the ban on non-compete agreements] shall not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

So, for the sale exception to apply, at least three components of a transaction must exist.

First, a “sale” must occur. The rule — and commentary supporting the rule — notably omits a definition of “sale,” which leaves an open question as to how, for example, the rule would apply to an exclusive license of intellectual property rights from a business entity or individual that is coupled with both a substantial sale-like amount of consideration and a restriction on competition (and, in such example, would the “exclusive” nature of the license be interpreted as a prohibited restraint on competition?).

Next, the sale must be “bona fide” (as if a seller would enter into a transaction in bad faith just to subject themselves to a restriction on competition!).[3] The rule does not define “bona fide” and commentary to the rule provides that the FTC considered — and rejected — certain comments to the proposed rule that suggested a bright-line minimum purchase price or level of consideration be present for the sale exception to apply.

Finally, the sale exception, per its explicit language, requires that a business entity (or portion thereof) be the “thing” being sold. The rule defines “business entity” as “a partnership, corporation, association, limited liability company, or other legal entity, or a division or subsidiary thereof.” Per a strict read of the definition, the sale exception arguably would not apply to an individual seller of substantially all the assets of a sole proprietorship. As such, this author fully expects sole proprietorships to replace corporations and LLCs as the vehicle-of-choice for all entrepreneurs with plans to sell their business and avoid application of the sale exception (heavy sarcasm intended).

In a nutshell, most “standard” M&A-style non-compete covenants that can be found on the pages of our customary asset and stock purchase agreement forms are likely not going to be broadly invalidated by the rule under its current preliminary interpretation. This does not warrant any M&A practitioner claiming ignorance of the rule, however, as the rule will certainly have other implications in the M&A context beyond simply confirming if the sale exception applies (e.g., negotiation of post-closing employment arrangements).

Further, it is interesting to note the deference provided to states in the commentary supporting the sale exception, including comments such as:

“... non-competes allowed under the exception will continue to be governed by state law, which generally requires a showing that a non-compete is necessary to protect the value of the business being sold. ...,”

and, in supporting the FTC’s refusal to delineate transactions that are not “bona fide”: “Courts have effectively identified and prohibited such schemes pursuant to state statutes prohibiting non-competes.”

So, a seller of a business entity (ahem, excuse me, a bona fide seller) that has found themselves potentially sidelined from their profession-of-choice via application of the sale exception must, after muttering the obligatory “thanks for nothing, FTC”, look to state law for any potential defense against enforceability of a non-compete provision applicable to the business sale.

Generally, Tennessee courts have characterized non-compete covenants that are “incidental to the sale and transfer of a trade or business, and which purport to bind the seller not to engage in the same business in competition with the purchaser are lawful and enforceable if they are reasonable and go no further than affording a fair protection to the buyer.”[4]

It will be interesting to see if Tennessee and other states that impose similar “reasonableness” standards will look to the rule (and the sale exception) to aid in defining what is “reasonable” for purposes of the common law standard. Could we also see a trend of sympathetic courts that are unwilling to apply an FTC-style sale exception to non-compete enforceability and instead use the momentum of the rule’s potential impact on the public’s disfavor of non-competes to simply invalidate such prohibitions universally? It would also not be surprising if state legislatures attempt to take control of the issue by promulgating their own statutory limitations on these matters.

As a parting gesture, let’s give thanks to Rule 5.6 of the Tennessee Rules of Professional Conduct, which has been banning non-competes for attorney-“workers” in Tennessee before the FTC made it “cool” to do so.

Nathan Harris, a corporate partner in the Nashville office of Bradley Arant Boult Cummings, LLP, is a former chair and current executive council member of the TBA Business Law Section. His practice covers the entire business lifecycle, from assisting with entity formation and providing guidance on commercial transactions and fundraising to advising buyers and sellers in connection with complex M&A transactions. He has experience representing clients in a wide variety of industries, including technology startups, electronic payments companies, pharmaceutical wholesalers, veterinary practices, community banks and restauranteurs.

The U.S. District Court for the Eastern District of Tennessee and Chattanooga Chapter of the Federal Bar Association have announced the winners of the 6th Annual Civics Essay Contest, which centered on the question of whether social media platforms have a right to restrict political speech. Students were invited to share their views on laws that seek to regulate how social media platforms restrict, moderate and prioritize user-posted political content. Middle school winners are: Liam Smitherman (1st Place), William Lacy (2nd Place) and Anders Porth (3rd Place). High school winners are: Ryan Matthews (1st Place), Gracie Hibbs (2nd Place) and Amiya Phade (3rd place). All winners will receive cash prizes at a ceremony at the Joel W. Solomon United States Courthouse in Chattanooga on May 2 at 4:30 p.m. EDT.

The Tennessee Supreme Court has directed Davidson County lawyer Howard MacCarthur Romaine to resolve outstanding obligations with the Tennessee Department of Revenue, the Appellate Court Cost Center and the Board of Professional Responsibility by June 10 or it will dismiss his petition for reinstatement to active status. Romaine petitioned the court on March 25 to have his law license transferred from disability inactive status to active status. He has been on disability inactive status since Jan. 24, 2017.

American Bar Association (ABA) Business Law Section has established a Model Business Corporation Act Resource Center, a web-based tool that provides easy, public access to the current version of the Model Business Corporation Act (MBCA). The MBCA is a model act promulgated and periodically amended by the section’s Corporate Laws Committee. It provides a modern body of statutory corporate law that is regularly updated by the committee based on judicial decisions, recent legislative enactments and other legal and technological developments. According to the ABA, Tennessee has adopted the MBCA and codified it in Tennessee Tenn. Code Ann. §§ 48-11-101 et seq. Read more in a news release from the group.

Tennessee Attorney General Jonathan Skrmetti has announced that Tennessee has received a payment of $146.1 million this year from major tobacco companies that joined the Tobacco Master Settlement Agreement. Since 1998, Tennessee has received $3.9 billion from the settlement. The landmark agreement resolved Tennessee’s lawsuit against major tobacco companies for violations of consumer protection laws and deceptive marketing practices that caused damages to the state, including increased health care costs. Read more about the settlement.

The ACLU of Tennessee has challenged a state rule governing what gender is listed on a person's driver's license, the Tennessean reports. The organization filed the lawsuit on behalf of a Monroe County transgender woman and asked the court to block the rule. In 2023, the Tennessee General Assembly passed a law defining a person's sex based on "immutable" physical and genetic characteristics at birth. That same year, the Tennessee Department of Safety and Homeland Security implemented the policy that it would not change driver's license gender markers to something different than the sex given on a person's original birth certificate. In addition to arguing that the policy discriminates, the ACLU says the department did not go through the appropriate procedures required for creating a new rule under state law.

Shelby County lawyer Kelvin Arthur Massey received a public censure from the Tennessee Supreme Court on April 23. The court found that while under active suspension from the practice of law, Massey engaged in unauthorized practice by providing legal advice, drafting legal documents, providing legal services, and holding out to the public that he was an attorney licensed to practice law in Tennessee. His actions were determined to violate Rules of Professional Conduct 3.4(c), 5.5(b)(2) and 8.4(g).

The Federal Trade Commission’s (FTC) new rules barring non-compete agreements for most employees, released yesterday, already have been challenged in two suits. The first was filed yesterday by a tax service in Texas. Today, the U.S. Chamber of Commerce filed in a different federal court in Texas. That suit alleges that the FTC lacks the power to adopt such sweeping rules. The ban, announced yesterday, is set to take effect in August, Reuters reports.