THE END OF THE NON-COMPETE?

By Amandeep S. Cheema, Esq.

Celebrations of free market capitalism on one side, and accusations of egregious agency overreach on the other. The Federal Trade Commission’s long expected ban on employer enforced non-compete provisions is finally here.

On April 23, 2024, the Federal Trade Commission (FTC) voted on the Non-Compete Clause Rule, which bans the implementation of non-compete contracts in an employer-employee relationship. The purpose of the new rule is to allow employees to move freely between jobs without advertently or inadvertently wandering into the minefield of restrictive covenants imposed by a previous employer. The rule also restricts employers from enforcing existing non-compete clauses, with the exception of senior executives. However, the rule does restrict employers from imposing new non-compete agreements on senior executives going forward. Expected to face a myriad of constitutional challenges before then, the rule becomes effective 120 days after the vote.

What is a Non-Compete Agreement?

In an employer-employee relationship, a non-compete agreement is often included as part of the employment agreement to prevent the employee from engaging in business activities that directly compete with the employer during, and often for a defined period after termination of employment (often referred to as the “restricted period”). The purpose of a non-compete is to protect the employer's business interests from competitive forces within a defined geographic area. By example, a software company may have non-compete agreements in place with its engineers to ensure the maintenance of a competitive advantage in the event that an engineer seeks greener pastures, especially with a competitive business entity.

Other Restrictive Covenants Available

While non-compete agreements are now on their way to extinction, employers can still include various other restrictive covenants in their employment agreements to protect their business interests. These provisions can be critical in preventing unfair competition without unduly restricting an employee's future employment opportunities. Here are some commonly used restrictive covenants:

1. Non-Solicitation of Employees: A non-solicitation of employees provision prevents departing employees from hiring or soliciting, or encouraging any other person/entity hire or solicit, their former colleagues to join a new employer or venture, or to generally leave the employment of employer. The purpose of this provision is to protect the employer's workforce constitution by preventing a mass exodus orchestrated by a former employee.
2. Non-Solicitation of Customers/Clients: Similar to the non-solicitation of employees provision, a provision restricting the non-solicitation of customers or clients prevents former employees from approaching or doing business with the employer’s clients or customers. The purpose of this provision is to safeguard the employer’s customer base and prevents former employees from using established relationships to divert business to a competitor or new business.
3. Confidentiality/Trade Secrets/IP Clauses: Confidentiality, Trade Secrets, and Intellectual Property provisions within an employment agreement are imperative to protect a company’s proprietary information, including trade secrets, intellectual property, and other confidential data. If an employment agreement contains well drafted and detailed provisions related to said proprietary information, employees shall be contractually required to keep the employer’s proprietary information secret both during and after their employment term.

Non-Competes in M&A (Still Alive!)

It is important to note that the new FTC rule will not apply to M&A or other business purchase and sale transactions. Pursuant to the exceptions defined under § 910.3 of the rule, “bona find sales of business” are exempt. Non-compete clauses can still be enforced on sellers for a defined post-transaction period to ensure that a seller does not start a competing business that could undermine the value of the entity just sold. This is crucial for buyers in the M&A market, who need to protect their investment and the competitive advantage of the acquired business. Such non-compete agreements are typically negotiated as part of definitive purchase agreement in a deal and are considered essential for securing a buyer's interests.

Stay tuned as we continue to monitor the inevitable challenges that the FTC rule will face in the courts and from other administrative agencies.