By G. A. Finch

Spring 2024 brought the business community a monumental development in the law of non-competition covenants.  The business community and lawyers will sort through its  impact over the summer and navigate its application and legal sufficiency in the coming months.

Under its issued final Non-Compete Clause Rule, the Federal Trade Commission (FTC) has determined:

• Non-compete clauses for workers are an unfair method of competition

• “Worker means a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The term worker includes a natural person who works for a franchisee or franchisor…”

• Non-compete clauses existing for non-executive workers will be unenforceable after the effective date of the final rule and an employer must notify such workers that existing non-competes are not enforceable after the effective date

• Non-compete clauses now existing for senior executive workers who receive a certain level of compensation and make policy can remain enforceable

FEDERAL TRADE COMMISSION BUILDING

For those dear readers who are either unfamiliar with or not well versed in non-compete covenants, agreements or contracts (“non-competes”), in short, these agreements  restrict an individual from going to work for another organization,  business, or company that is deemed to be competing  or potentially competing with an organization, business or company that seeks the restriction on such competition.  The individual could be an employee (worker), an executive or a selling owner who  would be leaving the company.  The agreements that would contain the non-compete would typically be an employment contract, a separation (severance) agreement, or a contract to sell a business. 

There are other collateral kinds of restrictive agreements like non-solicitation of existing customers and employees, trade secret and intellectual property protection agreements, and non-disclosure agreements that are frequently utilized by organizations and companies in conjunction with non-competes.  Although these types of agreements should be noted, they are  beyond the scope of  this blog post.

The non-competition restrictions could be defined by one or more limitations such as by geographic area, kind of business, and/or time limitation.  What supports the  contractual “validity” of the restriction is the restricted party’s benefit received by being employed or receiving some additional financial compensation in the case of an employee,  like stock, or being paid for the value of the business in the case of a selling owner.

Non-competes have been pervasive for many years in American business but have become increasingly disfavored. A prime  example is the 800-pound economic gorilla, the State of California, which prohibits employment non-compete covenants.  To extend the gorilla metaphor further, now the regulatory King Kong, the FTC, on April 23, 2024 formally has issued  its Non-Compete Clause Rule that all but eliminates non-competes except a) to “grandfather” in existing non-compete agreements for senior executives who  received annual compensation of at least $151,164 and who are in policy making positions and b) to allow for non-compete agreements concerning individuals who are selling their businesses.  Both exceptions make sense.  With respect to existing senior executives, to unravel pre-existing compensation for non-compete restrictions would be impractical and mostly infeasible.  With respect to the buyers of the businesses, getting and protecting their value of the purchased business would be compromised without a non-compete.

FEDERAL TRADE COMMISSION SCULPTURE: “Man Controlling Trade”

Significantly, the final rule  additionally excepts its application  to

   “(b) Existing causes of action. The requirements of [the final rule] do not apply where a cause of action related to a non-compete clause accrued prior to the effective date.

   (c) Good faith. It is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that [the final rule] is inapplicable.”

The final rule by the FTC substantially limiting the use of non-competes is expected to go into effect on September 4, 2024. Certain business interests oppose FTC’s final rule on non-competes and have sued the FTC over the final rule.  One can only speculate whether plaintiff business groups will  prevail in court.  I have scrutinized the FTC’s Non-Compete Clause Rule, and it is comprehensive, well researched and thoroughly documented.  It would behoove businesses and individuals affected by the rule to prepare for its implementation so as to not to be caught flatfooted should the rule be upheld.

Copyright © 2024 by G. A. Finch, All rights reserved. Your Executive Life Blog posts offer no legal advice and should not be construed as legal advice or as a legal opinion on a specific situation for a reader. This general information is not intended to create, and reading and receipt of this information, do not constitute an attorney-client relationship. The information in this blog post should not be used to undertake any action without prior consultation with an attorney.