The Federal Trade Commission (“FTC”) made a major move yesterday when it issued a proposed final rule (“Final Rule”) banning almost all post-employment/engagement non-competition agreements and clauses. We provide an overview of the Final Rule and some things to keep in mind for how this Final Rule may practically impact you. The team at Cantrell Schuette, P.A. will continue to monitor this developing issue. We are one of the few law firms nationwide that dedicates a large portion of its legal practice exclusively to providing counseling and litigation services for competition-related disputes – including workplace non-compete, non-solicit, and non-disclosure of confidential agreements and trade secrets. For additional information specific to you, please reach out to one of our non-compete lawyers:
William Cantrell
wcantrell@caklegal.com
Michael Schuette
mschuette@caklegal.com
What is Post-Employment Engagement Non-Competition Agreement?
The Final Rule defines a “[n]on-compete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (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.”
What Does the Final Rule Do?
The Final Rule applies to all entities subject to the FTC Act—i.e., it applies to all businesses except for non-profit entities. The Final Rule applies nationwide and:
- Once effective, bans all new post-employment/engagement non-competition agreements (referred to generically as “non-competition agreements”) between entities and workers. A “worker” under the Final Rule is an employee, an unpaid worker, and an independent contractor. There is no carve out for the C-Suite or higher-income individuals. The Final Rule also does not apply to non-competition agreements prohibiting a worker from competing against a business while still employed/engaged.
- The Final Rule prohibits the enforcement of future and existing non- competition agreements, except that for a period of time existing non- competition agreements to remain in place for senior executives. A senior executive is typically someone earning more than $151,164 annually who is in a policy-making position.
- Does not require formal recession of existing non-competition agreements. However, a business must provide notice to certain current and former workers that non-competition agreements are no longer enforceable.
- Includes an exception to the ban for the sale of a business, regardless of the seller’s ownership percentage of that business.
- Does not apply to contracts involving franchisees and franchisors, though the ban does apply to all workers engaged/employed by a franchisee or franchisor. Additionally, while not a part of the Final Rule, two commissioners called for more work on the franchisee/franchisor front, which may be something to watch for.
- Supersedes all contrary state laws.
- Allows fines, penalties, and other injunctive relief for violations under Section 5 of the FTC Act.
- Becomes effective 120 days after publication in the Federal Register.
- Does not impact state and federal trade secret laws.
What Do I Do Next and What Does this Mean for Me?
Understandably, with such a major change, many businesses and individuals wonder how this will impact them and what they can do to prepare. Though the Final Rule will not be effective until 120 days after publication in the Federal Register, the following can be in preparation:
- Prepare Your Message: Prepare your messaging and language for your announcement to workers concerning the company’s response to the new FTC Final Rule. A business does not have to rescind its non-competition agreements immediately, and we recommend it does not or that it hedges its language in the event the Final Rule is overturned by the U.S. Supreme Court.
- Consider Other Types of Contractual Restrictions: Your business should determine what interests it needs to protect and consider whether other types of restrictive covenants outside of a non-compete agreement can protect the business. The Final Rule bans only non competition agreements. It does not ban non-solicitation and non-disclosure agreements. A well-drafted non- solicitation or non-disclosure agreement allows a business to protect the investments it has made in relationships with its workers, vendors, customers, and prospective customers, as well as the sensitive business information it trusted a worker with. If you would like assistance with drafting one for yourself, we have considerable experience. It is also important to keep in mind that an overbroad agreement that essentially functions as a non-competition agreement may be banned even if referred to by a different name.
- Review Existing Restrictive Covenants: Do not wait. Have your existing employment agreement and restrictive covenants reviewed by an attorney who specializes in employee mobility issues. Even if you have a non- solicitation or non-disclosure agreement, they are not all drafted equally. Frequently, the language in those types of agreements leaves considerable holes that do not give a business what it thinks it is receiving. A lawyer with a lot of experience in this area, like the attorneys at Cantrell Schuette P.A., can help you tighten up your language so that you can protect what needs protecting.
- Prepare Your Notice: Prepare your notice and sit tight for the first part of the 120 days. The Final Rule does not go into effect for 120 days after publication in the Federal Register. Because the vote was largely along partisan lines and addresses an area that states have traditionally regulated, there will be likely challenges to the Final Rule’s constitutionality. Indeed, the US Chamber of Commerce has already filed such a challenge and there is a strong possibility that the district court that hears this lawsuit will have the ability to issue a preliminary injunction or temporary restraining order on the Final Rule. This would delay the operation of the Final Rule while the challenge is decided.
- Ongoing Litigation: If you are a party to a noncompete lawsuit that was filed before the Final Rule’s effective date, that case can still move forward. The Final Rule includes an exception for causes of action related to non- competition agreements that accrued before the Final Rule’s effective date. This includes, per the FTC, a case “where an employer alleges that a worker accepted employment in breach of a non-compete if the alleged breach occurred prior to the [Final Rule’s] effective date.”