Noncompete agreements prevent employees from working for competitors or starting competing businesses for a certain period of time (sometimes years) and/or within a certain geographic area after leaving a job. These agreements also are designed to protect employers by preventing former employees from using proprietary knowledge or trade secrets in competing ventures.
The 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 same field 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 same field in the United States after the conclusion of the employment that includes the term or condition.” Obviously, this definition remains open to interpretation.
Coming on the heels of an Executive Order in 2021, the FTC's recent move to ban most noncompete agreements nationwide has stirred controversy.
1. Proponents argue that the ban will promote competition, increase wages, and foster innovation by allowing employees to move freely between jobs.
2. Critics worry about the potential negative impacts on businesses' ability to protect trade secrets and make long-term investments in their workforce.
On April 23, 2024, the Federal Trade Commission (FTC) finalized a rule that prohibits (bans) employers from enforcing noncompete agreements against most workers. The rule is intended to override state laws that conflicts with the new rule.
The rule will likely become effective around September 4, 2024, barring any legal challenges that might delay its implementation.
1. Senior Executives: Existing noncompetes can still be enforced for senior executives who are in policy-making positions and earn more than $151,164 annually. Employers cannot enter into new noncompete agreements with any employees, including Senior Executives, after the effective date.
2. Sale of Business: Noncompetes that are part of a bona fide sale of a business are exempt, ensuring that buyers can protect their investment from interference by the sellers of the business.
3. Non-Solicitation and Nondisclosure Agreements (NDAs): The rule does not prohibit non-solicitation agreements or NDAs, which can still be used to protect business interests without preventing employees from moving to other companies.
4. Preexisting Claims: Claims arising before the effective date from enforcement of an existing noncompete agreement.
5. Certain Industries: The rule does not apply to nonprofit organizations, banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act.
The ban on noncompetes is expected to increase job mobility and wage growth as employees are free to move between jobs without restrictions. It could lead to a more dynamic job market with increased opportunities for career advancement and entrepreneurship.
Prior to the effective date of the new rule, employers will need to provide notice to each worker who is subject to a noncompete in violation of the rule so long as the employer has either a mailing address, email address, or cell phone number for the affected worker. The notice must: (i) identify the person who entered into the noncompete clause with the worker; and (ii) be provided via mail, email or text message to the worker.
To protect trade secrets and customer, employee, and vendor relationships effectively without relying on noncompete agreements, businesses can consider several alternative legal and practical measures:
1. Non-Disclosure Agreements (NDAs)
Non-disclosure agreements require employees or contractors to keep specific information confidential and not disclose it to others or use it after leaving employment. These agreements are enforceable when they are carefully tailored to protect proprietary information rather than prevent competition.
2. Non-Solicitation Agreements
Non-solicitation agreements that do not prevent a worker from seeking or accepting other work or starting a business after their employment ends can prevent employees from soliciting or performing services for a company’s clients, customers, or employees after they leave the company. These agreements are particularly useful for businesses that rely heavily on maintaining strong, preexisting relationships with its customers, employees, and vendors.
3. Limited Use Agreements
Limited use agreements allow employees or contractors to use trade secrets for specific purposes but prohibit them from using them for any other purpose or disclosing them to others. This type of agreement helps ensure that sensitive information is used only in ways that benefit the company.
4. The Defend Trade Secrets Act (DTSA)
The DTSA provides a legal framework for companies to sue in federal court for the misappropriation of trade secrets.
5. Garden Leave Clauses
Garden leave clauses can be used to keep employees on the payroll for a certain period after they resign or are terminated, during which they are not allowed to work for competitors. This helps prevent the immediate use of trade secrets by competitors.
6. Clawbacks for Paid Training
Companies can implement clawback provisions that require employees to repay the cost of training if they leave the company within a certain period. This discourages employees from leaving soon after receiving expensive training and potentially using that knowledge at a competitor.
The FTC passed the rule narrowly by a 3-2 vote. It is viewed as overreaching of the Executive Branch’s authority and likely will face Constitutional challenges in the coming months.
In summary, noncompete agreements are a contentious issue because they sit at the intersection of protecting business interests and promoting employee freedom and innovation. The debate over their use and enforceability reflects broader concerns about labor rights, economic competition, and the future of work, which may be challenged in the near future.
