Estimated reading time: 8 minutes
Just in case you missed it, the U.S. Federal Trade Commission (FTC) issued a final rule in April banning noncompete agreements nationwide. The rationale behind this Rule is to ensure that workers have the freedom to pursue new opportunities, start a new business, or create a new product / service.
That being said, I’m sure employers have questions … lots of questions. So, I reached out to our friends at Buchanan Ingersoll & Rooney to see if they would share their knowledge with us. And thankfully, they said yes.
Carrie Amezcua is counsel at Buchanan Ingersoll & Rooney and focuses her practice on antitrust and trade regulation counseling and transactions. She counsels clients on a variety of antitrust issues, including pricing policies, joint ventures, exclusive contracts, distribution practices, patent misuse, and state action immunity. Carrie has experience in antitrust litigation in a variety of industries and venues.
Please remember that Carrie’s comments should not be construed as legal advice or as pertaining to any specific factual situations. If you have detailed questions, they should be addressed directly with your friendly neighborhood attorney.
Carrie, thanks so much for being here. Let’s start our conversation with a definition. What is a non-compete agreement?
[Amezcua] A noncompete agreement is an agreement between the employer and employee that prohibits the employee from working for a competitor of the employer. A noncompete agreement can be in effect during the term of employment or continue after employment.
The Federal Trade Commission (FTC) recently approved a final Rule to ban almost all post-employment non-compete agreements. Can you briefly share what the final Rule says?
[Amezcua] The FTC is solely concerned with post-employment noncompete agreements that prohibit employees from working for a competitor of the employer for a time period after the employee leaves the employer for any reason (e.g., termination, resignation).
- The Rule bans all new post-employment noncompete agreements between an employer and employee, regardless of industry or type of worker (e.g., senior executive versus lower level), after the effective date.
- The Rule allows existing post-employment noncompete agreements to remain in effect for senior executives only. Senior executive is generally defined as employees “earning more than $151,164 annually who are in a policy-making position.”
- Formal recission once the Rule is effective of existing noncompete agreements is not required, however, notice to employees that post-employment noncompete agreements are no longer enforceable is required.
- The Rule does not apply to noncompete agreements entered into pursuant to a bona fide sell of ownership interests or assets of a business.
- The Rule does not apply to franchisee/franchisor contracts (though does apply to employees working for a franchisee or franchisor).
- The Rule will be effective 120 days after publication in the Federal Register (estimating the effective date to be early August).
- The Rule pre-empts state laws governing noncompete agreements to the extent those laws are less restrictive. If a state law restricts noncompete agreements that fall outside this Rule (e.g., physician non-compete agreements, senior executive non-compete agreements), the state law can still be enforced.
Now that the FTC has defined what companies can’t do, are there situations where a noncompete agreement is still allowed? If so, can you give us an example?
[Amezcua] As noted above, the Rule does not apply to noncompete agreements entered into pursuant to a bona fide sell of ownership interests or assets of a business. It also does not apply to franchisee/franchisor contracts.
It does not apply to existing post-employment agreements with senior executives. As a result, some companies without noncompete agreements with senior executives may evaluate whether to enter into them before the Rule becomes effective. However, uncertainties exist with the current court challenges. And it is generally advisable to have a legitimate business reason to enter into a noncompete agreement with a senior executive when you have not had them previously.
In addition, it does not apply to entities that do not fall within the jurisdiction of the FTC, in particular not for profit entities. However, the FTC has said, and has brought complaints against, tax exempt entities that seek to make a profit on behalf of their members, so tax exempt status is not enough to exclude an entity from the FTC’s jurisdiction.
And of course, by definition, the Rule does not apply to non-compete agreements that are in effect only during the course of employment.
I know that none of us can predict the future, however, several organizations have said they will challenge this Rule. Some organizations might be wondering if they should wait until the court challenges are exhausted before addressing the matter. What are the advantages / disadvantages to this line of decision making?
[Amezcua] As you may have seen, the U.S. Chamber of Commerce filed a complaint and a motion for a preliminary injunction or stay of the Rule in federal court in Texas. Two other private plaintiffs, including another one in Texas (Ryan LLC. v. FTC) have also filed complaints against the Rule. The U.S. Chamber of Commerce had expected a decision as to whether the Rule will be stayed within 8-10 weeks. However, the Texas court just stayed the Chamber’s case pending the resolution of Ryan LLC. v. FTC because it was filed first. So, there is uncertainty on several fronts. There is uncertainty now as to the timeline of the court’s decision and uncertainty as to whether a stay will apply to only the single plaintiff, only members of the U.S. Chamber of Commerce, or would apply to any entity subject to the Rule.
Given the uncertainty around the Rule and its status, if a company tries to make adjustments now, it could be making adjustments based on something that will change in the near future, requiring further changes.
On the other hand, if a company changes its practice to adhere to the Rule now, the company will know it is taking a conversative approach to post-employment noncompete agreements and will increase its likelihood of being able to enforce such agreements.
Earlier in our conversation you mentioned notification. If an organization is currently using noncompete agreements, do they need to communicate with employees about the status of their agreement (prior to the final Rule taking effect)? Why or why not?
[Amezcua] At this point, they do not. The Rule is not yet effective and may be stayed entirely in 8-10 weeks. In addition, an organization should first examine its overall approach to noncompete agreements before communicating broadly. That approach is generally closely related to its protectible interests, such as its protection of confidential information and trade secrets.
It is important to note that the FTC, as well as private plaintiffs and state enforcers, do not need this Rule to challenge overbroad noncompete agreements. The FTC has challenged noncompete agreements recently without the Rule. And of course, there are always private plaintiffs bringing cases under state laws, which are all still in effect. Further, former employees often bring declaratory judgment actions to void overly broad noncompetes or ones that run contrary to certain laws, such as those in California.
Accordingly, it is a best practice for organizations to examine their use of post-employment noncompete agreements to ensure there is a legitimate business need for the noncompete agreement separate and apart from simply seeking to retain employees or keeping competitors from hiring those employees. For example, organizations need to ask whether the employee has truly proprietary or competitively sensitive information that needs to be protected and that cannot be protected any other way, including through a nondisclosure agreement.
I’m glad you brought up proprietary information. One of the reasons that organizations use noncompete agreements is to keep their secrets away from competitors. Will organizations still be able to use non-disclosure agreements to protect company information? Why or why not?
[Amezcua] Absolutely. Organizations can still use non-disclosure/confidentiality agreements, non-solicit provisions, and trade secret laws to protect their information.
For companies with trade secrets, the Defend Trade Secrets Act is a law that allows for injunctive relief and may result in a court enjoining an employee who has misappropriated trade secrets from working for a competitor. That federal law as well as other state trade secret laws remain in effect.
Organizations can even continue to use ‘garden leave’ (keeping an individual on the payroll for a defined time period but the individual does not have access to proprietary information during that period and is performing minimal work).
Last question. I’m sure that organizations will be looking for information about this final rule in the weeks or even months to come. Where can readers go to get more info?
[Amezcua] Please see Buchanan’s previous webinar related to the “FTC Ban on Noncompetes”. We will also be holding a webinar on July 10, 2024, with the latest updates. Registration information can be found on the Buchanan’s website.
We will continue to provide updates on the Rule and the cases challenging the Rule, and you may sign up here to receive further information.
A huge thanks to Carrie for sharing her knowledge with us. If you want to keep current with the latest updates on this Rule, be sure to sign up for information on the Buchanan website.
This is a good time for organizations to examine their practices when it comes to all the agreements – noncompetes, non-disclosures, non-solicitations, confidentiality, etc. The company wants to protect their trade secrets in a way that’s defensible. They also want to do it in a way that allows them to still attract and retain the best talent.
Editor’s Note: The Noncompete Clause Rule was published in the Federal Register today. The effective date is September 4, 2024. You can download a copy on their website.
Image captured by Sharlyn Lauby while exploring the streets of Orlando, FL
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