What Should You Do in Light of the FTC’s Effort to Ban Non-Compete Agreements?
In Alabama, and the vast majority of other states, non-compete agreements between employer and employee (i.e. bans on employment with a competitor) are enforceable if reasonable in scope and necessary to protect an employer’s legitimate business interests, such as trade secrets, confidential information, and customer relationships.
Non-compete agreements are under attack on both the state and federal level. Among the states, California, North Dakota, and Oklahoma have long banned such agreements. More recently, eleven states and the District of Columbia have enacted laws that ban non-compete agreements with employees paid less than a certain amount. Five states require employers to give notice that a non-compete will be required as a condition of employment. States also vary on the extent to which a court may reform or “blue pencil” an agreement that is too broad to make it more reasonable and, therefore, enforceable.
The most recent legislation in Alabama concerning non-compete agreements was enacted in 2016. The legislature amended Alabama’s non-compete statute in an effort to clarify when such agreements are enforceable, but the amendments really did very little to change the existing law. The current statute does establish some presumptively reasonable periods of restriction, such as two years for a non-compete agreement.
The federal government has now entered the arena in a big way. Earlier this month, the Federal Trade Commission (“FTC”), which has historically focused on anti-trust laws, issued a proposed rule that completely bans agreements that prohibit an employee from working for a competitor and on a nationwide basis. If the rule is issued in current form, employers would be required to tell their employees that their agreements are rescinded. The proposed rule would not prohibit agreements that prevent solicitation of customers and nondisclosure agreements. However, it uses a functional test whereby broadly worded non-solicitation and nondisclosure agreements that effectively preclude employees from working for a competitor could be considered a non-compete agreement that is unlawful under the proposed rule.
This proposed rule, if adopted (and if it survives legal challenge), would obviously be a game changer. The FTC explains its actions by saying that non-compete agreements stifle competition and innovation. It also says that the rule it proposes would increase wages by almost 300 billion dollars.
The proposed rule is in the comment phase. In all likelihood, the FTC will issue a rule that is very similar to what it has proposed before the end of this year. Based on the issues the FTC has specifically solicited comments on, it appears the FTC will consider allowing non-competes for senior executives and/or highly compensated workers. The rule would go into effect 180 days after it is issued. Inevitably, it would face lawsuits seeking to declare the rule illegal and to keep it from going into effect. If such a rule goes into effect, it is not likely to be until 2024.
What should employers do to prepare?
You do not have to do anything at this time. Again, the rule is a year or more away from being adopted and may never go into effect.
However, regardless of what happens at the federal level, the number of states that have banned non-compete agreements is growing. If you employ workers outside of Alabama, you need to be aware of how your agreements would fare in those other states.
Consider the other tools you have available to protect your “secret sauce” and your relationships with your customers (and employees).
- Trade secret laws remain in place at both the federal and state levels. What trade secrets do you have in your business and what are you doing to make sure such information or technology qualifies for protection under those laws?
- Consider whether a non-solicitation of customers provision, as opposed to a true non-compete that prohibits employment by a competitor, would be enforceable in the states where you have employees. Those agreements are less restrictive and are more likely to be enforceable.
- Reasonable non-solicitation of employee provisions are not affected by the FTC proposed rule and remain enforceable.
- As a general matter, non-disclosure agreements are also enforceable. However, they need to be well drafted and allow for certain exceptions, such as reporting illegal conduct.
- Give some thought and devote some resources to your company culture. Your workplace culture may play the largest role in your ability to attract and retain the talent you need. Today, and in the long run, your resources may be best spent on improving or maintaining your workplace culture. It will yield a greater return on investment than most of your other legal options.
We will continue to monitor the FTC’s proposed rule. We are always available to talk with you about your current strategy for protecting your competitive advantages in the marketplace and to suggest other measures that may help.
Written by: Trip Umbach
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