This week the Federal Trade Commission (FTC) voted to ban noncompete agreements in employment contracts. In a 3-2 vote, the FTC’s new rule – which is scheduled to take effect in 120 days after it is published in the Federal Register – will prohibit not only the inclusion of noncompete provisions in all future employment agreements, but will limit their enforcement with respect to existing employment contracts to only senior executives.
The new rule will likely be challenged in the courts, with pro-business organizations such as the U.S. Chamber of Commerce questioning the FTC’s authority to issue such a ban and threatening litigation. However, should it stand, this broad and wide-sweeping rule will change the landscape of the law related to employment agreements going forward.
Presently, with some outliers, most states allow employers to restrict employees via contract from accepting employment with competitors following their employment. For example, in New York, restrictive covenants not-to-compete will generally be enforced by the courts so long as they are reasonable in geographic and temporal scope, are not unduly burdensome and are designed to protect the legitimate interests of the employer.
With this latest measure by the FTC, such restrictive covenants in employment contracts are set to become a relic of the past and all employees will have the freedom to seek new employment opportunities without fear of a lawsuit from their former employers on the basis that a noncompete restrictive covenant has been breached. Moreover, employees with such noncompete clauses in their current employment agreements, with the narrow exception of certain senior executives, defined by the rule as being a worker in a “policy-making position” earning compensation of $151,164 or more annually, will no longer be subject thereto.
Nevertheless, assuming the FTC’s new rule survives the expected legal challenges brought against it, employers will not be wholly without recourse. Rather, employers will need to rely on other legal avenues to protect their interests, including but not limited to contractual provisions concerning nondisclosure, non-solicitation, trade secrets and confidential information. Further, the rule will not apply to existing causes of action that accrued prior to the effective date nor to noncompete clauses related to the bona fide sale of a business entity. Finally, an additional question remains as to the rule’s reach to entities claiming tax-exempt status, such as hospitals, as the FTC has indicated that merely claiming nonprofit status does not necessarily exempt an organization from the rule and that instead some of nonprofits may fall within the FTC’s jurisdiction. In other words, if you are a physician or health care provider subject to a non-compete, it may still be enforceable if you are employed by a non-for-profit hospital.
In light of the new FTC rule, both employers and employees should seek out legal guidance concerning existing employment agreements that contain noncompete provisions, particularly before terminating any such contract, as well as in connection to the negotiation of any new employment contracts.
If you are interested in learning more about this topic or need help navigating an issue related to a noncompete agreement, please contact me at [email protected].