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  • Writer's pictureJoe Dye Culik

Non-Compete Agreements: Gone at Last, or Here to Stay?

On April 23, 2024, the Federal Trade Commission approved a rule that both retroactively and prospectively banned almost all non-compete agreements in employment contracts. The rule goes into effect 120 days after its publication in the Federal Register.


Non-Compete Agreements: Gone at Last, or Here to Stay?
Non-Compete Agreements: Gone at Last, or Here to Stay?

 The only carve-out to the non-compete rule is for so-called “senior executives” who have already signed non-competes, i.e., executives who make more than $151,164 per year and who are in “policymaking positions.” Other than this limited retroactive exception, non-competes are dead in the water.

 

Or are they?

 

Shortly after the FTC’s vote to approve banning non-competes, multiple lawsuits were filed seeking to block the rule. The Chamber of Commerce and the Business Roundtable, along with two other groups, challenged the non-compete ban on constitutional grounds.

 

The Chamber of Commerce’s press release explained:

 

[N]oncompete agreements have been around longer than the 110-year-old FTC, and until now, no one has suggested that they are illegal. Challenging the FTC in court is about more than noncompete agreements. It is about stopping an astonishing power grab by the FTC.

 

Likewise, the Business Roundtable issued a statement saying the following:

 

When appropriately used, reasonable noncompete agreements protect essential investments in employees, R&D and innovation. By banning most noncompete agreements, the FTC’s rule will disincentivize investments in workers and make it harder for companies to compete globally.

 

The basis of the lawsuit to invalidate the FTC’s non-compete rule is that the FTC lacks constitutional authority to issue regulations proscribing “unfair methods of competition.” Regulating such unfair competition is ostensibly one of the main purposes of the Federal Trade Commission Act.

 

Moreover, the non-compete rule is alleged to be a “boundless and unconstitutional delegation of legislative power to the Executive Branch,” says the lawsuit. Under our Constitution, the Congress makes the laws, and the Executive (the President) enforces them. Here, though, says the lawsuit, an executive agency has created a law without the approval of Congress that retroactively declares all non-compete contracts to be illegal.

 

What will the outcome of this litigation be? And, most importantly for employers, what should they do about non-compete agreements with their employees?


Existing Agreements


First, employers need to be aware that existing non-competes are still perfectly legal. The FTC’s non-compete rule has a 120-day waiting period before it is effective. Employees are still bound under their current agreements and can be required to comply. As it stands – as of the writing of this post – nothing has changed. For now.


Rule Likely to be Stayed

 

Second, the non-compete rule is likely to be stayed (suspended) pending the resolution of the litigation. When a disputed rule such as this is challenged, the court, or maybe even the FTC, can order that the rule be put on hold until the case is resolved.

 

How to Prepare if Ban is Upheld


Third, employers should be prepared in the event the non-compete ban is ultimately upheld. Employers’ proprietary information may be protected in other ways, such as by non-disclosure and confidentiality agreements. Importantly, such agreements are not addressed by the non-compete rule, and will remain valid no matter the outcome of the litigation. Confidentiality agreements may be used to protect proprietary business information similar, although not identical, to the way non-compete agreements are. In our post Violation of a Non-Compete Agreement or Misappropriation of Trade Secrets?, we described how confidentiality agreements may be used as a sort of substitute for non-competes:

 

Under the North Carolina Trade Secrets Protection Act, “misappropriation” is defined as the “acquisition, disclosure, or use of a trade secret of another without express or implied authority or consent, unless such trade secret was arrived at by independent development, reverse engineering, or was obtained from another person with a right to disclose the trade secret.” G.S. § 66-152(1). Regardless of the fact that there was no agreement requiring employees to sign confidentiality or non-compete agreements, the court held that the Trade Secrets Protection Act may have been violated. Further, the departing employee may also have committed unfair and deceptive acts or practices, as well as breach of fiduciary duty.

 

Accordingly, employees who share a former employer’s trade secrets and confidential information with a new employer are still subject to legal action for such a violation, even if there is no non-compete.

 

Review Existing Non-Compete Agreements


Fourth, employers should review existing non-compete agreements and confidentiality agreements with their legal counsel. In the event that non-competes are eventually invalidated, their confidentiality agreements may need updating to address some of the contingencies that non-competes previously addressed. There are still fully legal methods that employers can implement to protect their valuable, hard-earned business information.

 

In conclusion, although the FTC non-compete rule is part of a greater trend throughout the United States to limit and restrict non-competes, it isn’t a law yet, and the rule is being challenged by some of the most powerful American business groups in existence. Employers should stay abreast of the ongoing efforts to invalidate it and should – as always – constantly assess the legal business climate in which they are operating.


 

Dye Culik PC is a Charlotte, North Carolina law firm representing businesses and entrepreneurs in transactional and litigation matters. Connect with us if you have questions on your business contracts and agreements.

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