Update: The FTC’s final rule banning post-employment noncompetes has been blocked by two federal district courts. Though the government has appealed to both the Fifth and Twelfth Circuit Courts of Appeal, but the commonly held view is that neither will overturn the district court decisions. It is also all but guaranteed that the incoming Trump administration will abandon any effort to continue the court battles (or even to enforce the rule). That said, employers should continue to be mindful of the various state noncompete restrictions and prohibitions which continue to apply irrespective of the lack of a federal rule.
Remainder of this blog post retained for reference purposes.
On April 23, the Federal Trade Commission (FTC) issued a “final rule” banning post-employment non-compete agreements. The commission concluded that for employers to enter into or enforce agreements that prohibit competition by a former employee after employment ends to be an unfair method of competition (and therefore a violation of Section 5 of the FTC Act).
It is worth noting that, while there are some differences with respect to existing agreements — such as between executive-level employees on the one hand and non-executives on the other — there are no differences with regards to agreements entered into after the effective date of the rule.
It is also worth noting that, as with California’s ban on non-compete provisions, the FTC adopted a “sale of business exception” to the rule, generally allowing non-competes in connection with the sale of a business or an interest in a business.
Following a Trend
The prohibition of non-competes has been a trend in the United States for some time, and it is our experience at Matchstick that most agency employers do not attempt to bind their employees to post-employment non-competes.
It is also our expectation, however, that the final rule will continue to be met with legal challenges from conservative business groups, which (particularly given the current construction of the Supreme Court) may prove successful.
What is (and what is not) a “Non-compete” Under the Final Rule?
The FTC’s final rule defines non-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 (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.
For purposes of the final rule, a non-compete is generally not a provision that restricts a former employee’s ability to: (a) use a former employer’s confidential information, (b) recruit a former employer’s employees, or © solicit a former employer’s clients.
However, if the provision is (or combination of provisions are) worded broadly enough to, or if the facts of the situation effectively operate to, in either case “function to prevent” a former employee from seeking or accepting work or operating a business, then such provision(s) can be unlawful pursuant to the rule. It is also worth noting that such “restrictive covenants” may be unlawful under applicable state law.
Read More: Should You Include a Non-Compete or Non-Solicit Clause in Your Employee Contracts?
Practical Impacts of the Final Rule
Given the final rule and the current status of the various states’ laws regarding restrictive covenants, it is worth reviewing your current employment agreements and policies to see if you may be trying to require or enforce unlawful provisions.
It is our experience that many agency executives and operations personnel aren’t fully aware of or don’t really understand the terms of their standard employment contracts or policies. If you have questions about your forms or policies, Matchstick can help.
