non-compete Archives - BusinessWest

FTC Bans Non-compete Agreements for Nearly All U.S. Workers

By Contributor July 5, 2024

Law

Sensible Move or Overreach?

By Meaghan Murphy, Esq. and John Gannon, Esq.

Meaghan Murphy

John Gannon

Non-compete agreements have long been the subject of intense debate. Some view them as a critical way to protect confidential and proprietary business information, while others view them as stifling the rights of workers to freely change jobs.

Taking the latter view, last year, officials at the Federal Trade Commission (FTC) proposed banning the use of non-compete agreements in the workplace. Because non-compete agreements prohibit workers from moving to or starting competing businesses for a designated period of time, from the FTC’s perspective, restrictions on employee mobility disadvantage workers who are seeking to change jobs, while at the same time harm businesses looking to hire employees. The net result, according to the FTC, hurts the economy overall and violates the Federal Trade Commission Act, which prohibits businesses from engaging in unfair methods of competition.

Just a few weeks ago, the FTC officially moved forward with its plan to eliminate non-compete agreements when it issued a final rule that will ban non-compete agreements nationwide starting Sept. 4, 2024. The new rule will impact an estimated 30 million workers — approximately one in five workers in the U.S.

“The rule does not impact non-disclosure and confidentiality agreements or non-solicitation agreements unless they prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work or operating a business.”

In this article, we take a closer look at what is required by the new rule, legal challenges to the nationwide ban, and strategies for employers who have non-compete agreements currently in place.

What Does the Rule Actually Say?

Here are the most important things businesses need to know about the new rule slated to take effect on Sept. 4 of this year.

Employers are prohibited from entering into or attempting to enter into a non-compete agreement with any employees. Also, with one limited exception (discussed below), employers will not be able to enforce non-compete agreements currently in place. Further, there is an affirmative obligation on employers to provide clear and conspicuous notice to workers with existing non-competes that those agreements will not be enforced against them.

There is a ‘senior executive’ exception: for senior executives, which are defined as those in “a policy-making position” earning more than $151,164 annually, it is unlawful to enter into new non-compete agreements after Sept. 4, but current non-compete agreements for senior executives will be allowed to stay in effect even after the effective date of the rule.

The rule does not impact non-disclosure and confidentiality agreements or non-solicitation agreements unless they prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work or operating a business. In other words, as long as those agreements are not worded so broadly as to essentially be non-compete agreements, they are safe.

As is often the case, there are some exceptions to the rule. For example, the rule does not apply to workers at nonprofits. Non-competes between franchisors and franchisees are exempted, so any such agreements remain lawful to have or enter into in the future. The same goes for non-competes between the seller and buyer of a business.

Legal Challenges

Business advocacy groups have taken issue with the non-compete ban from the get-go, arguing that the FTC’s actions are classic government overreach. The U.S. Chamber of Commerce — which touts itself as the world’s largest business-association advocacy group — announced its intention to file a lawsuit to block the rule months ago.

The chamber emphasized that non-compete agreements are — and should continue to be —upheld or struck down under well-established state laws and, further, that such a broad rule applied to all businesses across all sectors is not appropriate for the FTC to implement unilaterally.

In addition to the Chamber of Commerce’s lawsuit, a global tax services and software provider based in Dallas (Ryan, LLC) is challenging the rule in a federal district court in Texas. According to that company, non-competes are a valuable tool for firms to protect their intellectual property and foster innovation, and the FTC rule would upend businesses’ ability to do both.

Several motions have been filed in that case, and the court has suggested that it will issue a ruling on the legality of the FTC’s rule soon. Whichever way that court decides, employers can expect the losing party to appeal the decision to the Court of Appeals. After that, it’s possible the U.S. Supreme Court will weigh in.

What Should Employers Do?

Employers should collaborate with legal counsel to review all existing non-compete agreements and assess whether they will pass muster under the new FTC rule. If a business determines that most (if not all) of its non-compete agreements will be unenforceable come Sept. 4, management needs to craft a new plan aimed at protecting customer goodwill and shielding sensitive confidential information from disclosure.

As noted above, for the most part, non-disclosure and confidentiality agreements and non-solicitation agreements are not affected by the FTC’s non-compete ban. When properly drafted, these agreements can achieve the same goals as a non-compete without running afoul of the new FTC rule.

Businesses should also monitor the status of the FTC’s rule. We expect courts will issue important rulings in the FTC non-compete rule litigation very soon. If those decisions leave the rule in place in its current form, employers may need to issue notices compliant with the rule to those workers that fall within its protections, as well as refrain from requiring non-competes be signed by any workers in the future.

John Gannon is a partner with Springfield-based Skoler, Abbott & Presser, specializing in employment law and regularly counseling employers on enforcing restrictive covenants and protecting trade secrets. Meaghan Murphy is an associate with the firm and specializes in labor and employment law; (413) 737-4753.

Non-compete Agreements May Be in Jeopardy

By Contributor May 9, 2024

Law Special Coverage

Challenging the Rule

By Trevor Brice, Esq.

On April 23, the Federal Trade Commission (FTC) issued a final rule banning non-competition agreements for all employees. While this action by the FTC was expected, there were many unanswered questions about the final impact of the non-compete rule in regard to existing non-compete agreements and its scope as applied to future non-compete agreements. These questions were answered under the final rule as promulgated.

Most Non-competition Agreements Banned

The FTC’s final rule banning all non-competition agreements is effective 120 days after its publication in the Federal Register. As of the effective date, all non-competition agreements are banned, with close to no exceptions, except for franchisor/franchisee relationships and for sales of a business between buyer and seller.

Independent contractors are also included under the umbrella of employees that would no longer be subject to non-competition agreements under the final rule. This would effectively mean that many employees in industries such as film, finance, and other professional services now have the right to switch between employers, which the FTC states “will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to the market.”

Trevor Brice

“The U.S. Chamber of Commerce has already vowed to block the rule, calling it ‘an unlawful power grab’ and arguing that the authority to govern non-competition agreements should be left to the states.”

However, and of note, the FTC does not have jurisdiction over nonprofit employers, so non-competition agreements are enforceable in this regard despite the FTC’s final rule.

Final Rule Retroactive as to Lower-wage Workers

In addition to prohibiting all non-competition agreements after the effective date of the final rule with limited exceptions, the FTC’s rule is retroactive, prohibiting certain non-competition agreements before the effective date of the rule as well.

Existing non-competition agreements can remain in effect as to senior executives, which are defined in the rule as employees in ‘policy-making positions’ making at least $151,164 per year. Existing non-competition agreements with employees who do not meet this definition are no longer enforceable per the final rule.

Despite the final rule, employers do not need to modify existing non-competition agreements by rescinding them. Employers do, however, need to notify their workers that the employer will not enforce non-competition agreements in the future. The FTC has included in its final rule model language for informing employees of this change, which can be communicated through email, text, or in paper format.

The final rule does not generally impact non-disclosure agreements or non-solicitation agreements unless they prohibit a worker from seeking or accepting work or operating a business. Employers should be aware that more restrictive state laws governing non-competition agreements remain in effect.

Challenges to Final Rule Looming

As of the announcement of the FTC’s final rule, challenges are already looming. The U.S. Chamber of Commerce has already vowed to block the rule, calling it “an unlawful power grab” and arguing that the authority to govern non-competition agreements should be left to the states.

The statement issued by the Chamber of Commerce goes on to note that, “since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Non-compete agreements are either upheld or dismissed under well-established state laws governing their use.”

This announcement by the U.S. Chamber of Commerce will undoubtedly lead to other challenges through the court system. Indeed, a Dallas-based global tax-services and software provider has already filed suit against the Federal Trade Commission over the impact of the final rule.

The FTC, as the Chamber of Commerce rightly points out, has no authority to write its own competition rules. The FTC can, however, make rules if it goes through the proper rule-making process, including introducing proposed legislation and leaving it open to comment for a certain amount of time, which did occur here.

However, even following this process does not ensure that the rule will stand. The rule still remains open to court challenges from the Chamber of Commerce, individuals, or organizations affected by the rule or any other stakeholders within the final rule. This could mean that changes would be on the horizon for the rule, and possibly a narrowing of its already expansive application.

Takeaways

As noted, the FTC’s final rule is already being challenged through the court system, and a challenge from the Chamber of Commerce will most likely follow suit. Therefore, if an employer has existing non-competition agreements, the employer may not need to rescind them just yet.

Further, if employers are intending to enter into non-competition agreements that are reasonable and enforceable under existing state laws, other options, such as non-disclosure agreements and non-solicitation agreements, may have to be used, but it would be prudent to wait on further ruling from the existing challenges to the final rule.

In the meantime, consultation with an attorney will aid in navigating the changing landscape of non-competition agreements.

Trevor Brice is an attorney who specializes in labor and employment-law matters at the Royal Law Firm LLP, a woman-owned, women-managed corporate law firm certified as a women’s business enterprise with the Massachusetts Supplier Diversity Office, the National Assoc. of Minority and Women Owned Law Firms, and the Women’s Business Enterprise National Council.

Rule Would Ban All Non-compete Agreements, and Possibly More

By Contributor March 1, 2023

Features

A Changing Landscape?

By John Gannon, Esq.

John Gannon

Last month, President Biden gave his State of the Union address, during which he hyped the legislative accomplishments made during his time in the Oval Office. One of the topics that made the list: non-compete agreements.

Specifically, the president discussed the Federal Trade Commission’s (FTC) proposed rule to ban all non-compete agreements in the workplace. The rule could affect the employment terms of more than 30 million American workers.

Background

As many readers are likely aware, Massachusetts state law already restricts the use of non-compete agreements in the workplace. The Massachusetts Noncompetition Agreement Act (MNAA), which was passed back in 2018, prohibits non-compete agreements with non-exempt employees. In addition, non-compete agreements are enforceable only if an employee is terminated for cause. Under the MNAA, non-competes generally must be limited to 12 months, and must be supported by garden leave (i.e., paying the employee some amount of money during the non-compete period).

The MNAA does not prohibit agreements restricting employees from soliciting business with customers or clients, nor does it impact non-disclosure agreements meant to protect dissemination of trade secrets. And non-compete agreements entered into after the effective date of the MNAA — Oct. 1, 2018 — are not affected.

On Jan. 5 of this year, the FTC proposed its own rule that would ban all non-compete agreements, with limited exceptions. The proposed rule also bans ‘de facto’ non-competes, which could include anti-solicitation and non-disclosure agreements, depending on how they are written.

According to the FTC, “when employers use non-compete clauses to restrict workers from moving freely, they have the power to suppress wages and avoid having to compete to attract workers. Based on existing evidence, non-compete clauses also reduce the wages of workers who aren’t subject to non-competes by preventing jobs from opening in their industry.” The FTC estimates that “the proposed rule could increase workers’ earnings across industries and job levels by $250 billion to $296 billion per year.”

The Proposed Rule

The FTC’s proposed rule would ban all non-compete agreements between employers and employees, as well as independent contractors. The rule defines a non-compete as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment.”

This is not limited to traditional non-compete provisions that limit an employee from seeking work with a competitor. The rule would encompass post-employment restrictions that ostensibly prohibit the employee from seeking future employment. Certainly, an argument could be made that overly broad non-solicitation or non-disclosure agreements have the effect of prohibiting a worker from going to work elsewhere.

Unlike the MNAA, the FTC’s proposed rule would rescind all employment non-compete agreements currently in place. It would also require employers to inform employees currently subject to a non-compete agreement that the agreement is no longer valid.

Strong Resistance

Not surprisingly, the FTC’s proposed rule does not sit well with businesses.

Calling the rule “blantantly unlawful,” the U.S. Chamber of Commerce noted that, “since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.

“Attempting to ban non-compete clauses in all employment circumstances,” the chamber went on, “overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, non-compete agreements are an important tool in fostering innovation and preserving competition.”

The FTC has invited public notice and comments on the proposed rule through March 20. Businesses and others can submit comments at www.regulations.gov/document/FTC-2023-0007-0001. After the close of this comment period, the FTC will publish a final rule, incorporating the input it receives.

This will just be the beginning. After the rule is issued, employers and trade associations are certain to challenge the rule in court. Ultimately, the legality of this rule may be decided by the U.S. Supreme Court, which is precisely what happened with the recent rule proposed by OSHA mandating a COVID ‘vaccine-or-test’ policy for larger employers. This rule was struck down by the Supreme Court earlier this year.

Next Steps for Employers

Many businesses in Massachusetts went through a non-compete process and procedure review back in 2018, due to the MNAA. However, employers need to understand that the proposed FTC rule goes beyond traditional covenants banning employees from working for competitors post-employment. It would be wise for employers to review non-solicitation and non-disclosure agreements currently in place to be sure they will be enforceable should the FTC’s proposed rule become the law of the land.

Businesses should also enhance any agreements meant to protect trade secrets and/or client relationships with suitable policies and procedures. This involves making sure confidential information stays confidential by limiting data access to ‘need-to-know’ groups. It also involves implementing polices geared toward ensuring that sensitive company information stays on site and cannot be accessed on an employee’s personal device.

Finally, employers should carefully follow the progress of the FTC’s proposed rule and work with legal counsel in drafting or enforcing non-compete and non-solicitation agreements going forward.

John Gannon is a partner with the Springfield-based law firm Skoler, Abbott & Presser, P.C., specializing in employment law and regularly counseling employers on compliance with state and federal laws; (413) 737-4753; [email protected]

FTC Bans Non-compete Agreements for Nearly All U.S. Workers