Tag Archives: noncompete

August 2024
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competition, Employment Law

FTC Noncompete Ban Enjoined Nationwide

On August 20th Judge Ada Brown issued a Memorandum Opinion and Order setting aside the FTC’s Non-Compete Rule. In doing so Judge Brown expanded the preliminary injunction she had previously issued. Judge Brown issued a nationwide, permanent injunction and stated the “Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter”.

Employers can breathe a sigh of relief because their noncompete agreements will now not automatically be null and void. But, employers should still make sure their existing and proposed noncompete and other restrictive covenant agreements ( like non-solicitation agreements and confidentiality agreements) comply with applicable state law. Employers should also consider whether a noncompete is really the best way to protect the business from unfair competition, or are other means a better choice.

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April 2024
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Employment Law

Can I Still Have a Noncompete Agreement With Employees After The FTC Announcement? What Employers Need To Know And Do.

Last week the FTC announced its long anticipated final rule on noncompete agreements. The final rule largely follows the previously published draft and bans noncompete agreements in most circumstances. There are, however, some exceptions. Furthermore, the rule is not yet law and may not become law.

First, the exceptions. Under the final rule a noncompete agreement is impermissible except for noncompetes entered into pursuant to a bona fide sale of: a business entity; all or substantially all of the entity’s assets; or the person’s ownership interest in the entity. The rule also does not apply to existing noncompete agreements with “senior executives”. The rule applies to employees and independent contractors or other “workers”.

“Senior executive” means a worker who, at the time the noncompete was signed, was in a policy-making position and received total annual compensation of at least $151,164 in the preceding year, or when annualized if the worker was employed during only part of the preceding year. Salary, commissions and nondiscretionary bonuses count towards the total, but the cost of lodging, board and fringe benefits do not. Since the bonus must be nondiscretionary an employer cannot pay a large discretionary bonus in an effort to make an existing noncompete enforceable against a departing employee.

Policy-making position means president, CEO or equivalent , or any other officer who has policy-making authority. Policy-making authority is defined as final authority to make decisions that control significant aspects of a business entity or common enterprise. This does not include those executives who have authority for policy decisions for only a subsidiary or affiliate of a common enterprise.

The rule does not specifically refer to non-solicitation provisions. Additionally, in a change from the previously published draft, broad confidentiality provisions are no longer specifically included in the definition of noncompetes. However, as discussed below this does not mean that overbroad nonsolicits and confidentiality provisions would automatically survive a challenge under the FTC final rule.

Unless one of the exceptions applies, it is illegal to enter into or attempt to enter into a noncompete clause, to enforce or attempt to enforce a noncompete clause or to represent that the worker is subject to a noncompete clause.

Within 120 days from publication of the final rule in the Federal Register employers must give notice to non-Senior Executives subject to a noncompete that the noncompete is no longer in effect and will not be enforced. The final rule contains a model notice for employers to copy or use as a guide.

Will the rule become law? To be determined. There are already two lawsuits pending in Texas seeking to enjoin the rule from becoming law. More litigation could follow.

To prepare for the rule possibly becoming law employers should do the following:

  1. Review existing noncompetes to see if the rule bans them.
  2. Review other restrictive covenants (non-solicits and confidentiality agreements) to see if they could be legitimately viewed as noncompetes. If the clause prohibits or prevents a worker from seeking or accepting work in the U.S. then it could be considered a prohibited noncompete.
  3. Prepare a notice for any noncompete that is prohibited. Employers should generally follow the model notice to avoid any argument that they failed to comply.
  4. Before the effective date of the final rule (120 days from Federal Register publication) enter into a noncompete with any Senior Executive that does not have one.

And, when in doubt, call your employment lawyer!

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January 2023
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Employment Law

The 411 on the FTC’s Proposed Noncompete Ban

On January 5th the Federal Trade Commission (FTC) issued a proposed rule that would ban noncompete agreements between employers and their workers in most circumstances. While the proposed rule will almost certainly be met with legal challenges and ultimately get resolved in the courts, let’s take a look at what you need to know now.

The proposed rule would make it illegal for an employer to enter into or attempt to enter into a noncompete with a worker.

The proposed rule covers all employers.

“Worker” is broadly defined as a natural person who works, whether paid or unpaid, for an employer and specifically includes independent contractors.

Existing noncompete agreements are covered by the ban. Employers must rescind the noncompete by the “compliance date” and are required to notify the worker of the rescission. The compliance date is 180 days after publication of the final rule in the Federal Register, which has not yet occurred.

The FTC has published model language that can be used to communicate the rescission.

The proposed rule makes no mention of non-solicitation agreements. It does, however, specifically state that a non-disclosure agreement that is so broad that it effectively precludes the worker from working in the same field is prohibited, as is an agreement to repay training costs if the worker’s employment terminates within a specified period if the required repayment is not reasonably related to the costs incurred for training.

Presumably, a narrowly tailored agreement that prohibits the solicitation of customers, the solicitation/recruiting of employees and the disclosure of trade secrets and confidential information will still be valid.

A noncompete entered into as part of a sale of business (asset or stock/ownership interest sale) is allowed provided that the individual being asked to sign the noncompete owns at least 25% of the entity being sold.

Although the proposed rule is not yet in effect and will likely be resolved in the courts, there are certain steps employers should take now.

First, if you are asking lower wage or lower level workers to sign noncompete agreements, stop. Those are most likely not enforceable under the applicable state law now, and are even less likely to survive the final outcome of the FTC’s proposed rule.

Second, ask yourself if a non-solicitation and nondisclosure agreement will give you the protection you need. If so, use that instead of a noncompete, as that will likely be enforceable.

Finally, review your existing noncompete, nonsolicit and nondisclosure agreements to see if these comply with applicable state law and if there is adequate protection in the event the noncompete is banned. If not, or if you need assistance, please contact us or call your attorney.

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