Employers Need to Carefully Prepare Agreements in Wake of New FTC Final Rule
Employers who require the execution of nonsolicit and NDA agreements going forward should soberly assess their workforce and determine which employees should be required to enter into any sort of restrictive covenant.
A special report by Tripp Scott's Paul Lopez and Jake Blumstein as published in:
In an administrative decision that may have lasting impacts for business owners throughout the United States, the FTC issued its final noncompete clause rule on April 23. The final rule adopts a comprehensive ban on new noncompetes with all workers after the effective date—120 days after the date of publication in the federal register. According to the FTC, noncompete agreements inhibit fair competition and, therefore, violate Section 5 of the FTC Act.
The final rule contains separate provisions defining unfair methods of competition for the two subcategories of workers. Specifically, the final rule provides that, with respect to a worker other than a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a noncompete clause; to enforce or attempt to enforce a noncompete clause; or to represent that the worker is subject to a noncompete clause.
The final rule provides that, with respect to a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a noncompete clause entered into after the effective date; or to represent that the senior executive is subject to a noncompete clause, where the noncompete clause was entered into after the effective date.
With respect to existing noncompetes, except for senior executives, all noncompetes will no longer be enforceable. If the rule becomes final and withstands challenges that are undoubtedly coming, this may turn various industries upside down. Senior executives with existing noncompetes that were executed prior to the effective date may be required to comply with their contractual noncompete agreements. The final rule does not apply to noncompetes entered into by a person pursuant to a bona fide sale of a business entity.
In response to copious comments from the public about the impact of the final rule on nondisclosure agreement (NDA) and nonsolicit agreements, the FTC explained that the final rule does not per se prevent NDAs or nonsolicit agreements. However, the FTC explained that if an employer adopts an NDA or nonsolicit that is so broad that it has the same functional effect as penalizing a worker for seeking or accepting other work or starting a business after their employment ends, such a term should be construed as an unenforceable noncompete clause.
Whereas employers in Florida previously erred on the side of providing overly broad restrictive covenants—with the understanding that courts were required to blue-pencil, or modify, overly broad restrictive covenants—the new FTC rule militates in favor of taking the opposite approach. Employers who require the execution of nonsolicit and NDA agreements going forward should soberly assess their workforce and determine which employees should be required to enter into any sort of restrictive covenant. Further, employers need to carefully prepare their agreements so that they are not construed as unenforceable noncompetes.
