Hot Off the Presses:
The Top 5 Things Employers Should Know About the FTC’s Non-Compete Ban

By Mark Zeidman, Attorney/Shareholder

On Tuesday, April 23, the Federal Trade Commission issued its final rule banning non-competes nationwide. Positioned by the FTC as “promoting competition and protecting the fundamental freedom of workers to change jobs, increasing innovation and fostering new business formation,” this controversial ruling has implications for employers across the country.

While the rule will become effective 120 days after it is published in the Federal Register – which should be very soon – there will be legal action to try to stop the rule from going into effect while challenges to it are resolved. Lawsuits have already been filed in the Northern and Eastern Districts of Texas to stop the implementation of the rule.

Based on recent events, and in our opinion, there is a Federal District Judge somewhere in the country who will enjoin the rule before it takes effect. After that, the timing is uncertain.

5 Things Employers Need to Know Now

  • The rule basically says that non-competition agreements are an unfair method of competition, and that it violates section 5 of the Federal Trade Commission Act for a person to enter into non-compete agreements with workers after the effective date. It also says that existing non-compete clauses cannot be enforced except with senior executives (defined as workers who make more than $151,164 and who are in a “policy-making position” with the employer). States which have banned non-competition agreements, such as California, North Dakota and Oklahoma, are familiar with this legal landscape.

 

  • There are exceptions which allow non-competes for the sale of a business in bona fide transactions, and the rule does not prohibit NDAs or reasonable agreements not to solicit customers of the employer, unless they are so overbroad as to amount to non-competition agreements.

 

  • While there is no doubt that non-competition agreements have economic value to employers, the FTC has concluded that elimination of the agreements will result in reduction in health care costs of $74-194 billion over the next ten years, increase new business formation by 2.7% (creating 8500 new businesses each year), increase the issuance of patents by 17-29,000 each year for the next decade, and increase worker earnings by $400-800 billion over the next ten years. The average worker‘s earnings would increase by $524 per year.

 

  • The fundamental legal challenge is expected to be that the FTC exceeded its authority under the relevant legislation in issuing this rule and that Congress, not an agency, would have to ban non-competes or declare them unenforceable.

 

  • In the short term, good guidelines for employers include:
  1. Review the agreements with your employees to determine which have non-competes or non-solicitation agreements, under a broad interpretation of what those agreement are (including non-solicitation agreements (in some cases) and determine if any of them qualify for senior executive status in terms of duties and salary.
  2. Be familiar with the notice form suggested by the FTC in case the rule does go into effect.
  3. Determine whether your business is even subject to FTC rules. They do not apply, for example, to non-profits, the relationship between franchisor and franchisee, or banks.
  4. Work with counsel to determine which of your agreements are affected by the proposed rule, and what position you want to take with regard to the use of non-competes in your business. Very often we are presented with issues where an employer who itself uses non-competes want to hire a worker who is under a non-compete.

 

A designated company spokesperson should be assigned to respond to questions from employees about this issue and what is going to happen. For now, we believe the prudent approach is to wait and see how the legal challenges shake out and NOT to cancel any existing non-competes unless and until it is clear that the rules have or will soon become effective.