There has been alot of buzz about the Federal Trade Commission’s recently approved final rule prohibiting noncompete provisions in most circumstances. A review of the agreements that you have in place and that are likely to be used in the future is worthwhile.
Why the concern?
Employers have traditionally looked for strong ways to protect trade secrets and other confidential information, and to limit employees from infringing on their business interests. Noncompetition covenants, whether in employee handbooks or in separate agreements, have been a useful tool. Often just the threat of enforcement is a deterrent.
Many noncompetition agreements are unenforceable under the FTC’s new rule.
The FTC rule prohibits all noncompete restrictions for employees, independent contractors, interns, volunteers, apprentices, and even sole proprietors who provide services to business entities.
There are carve-outs for existing and future noncompetition restrictions that are created for sale of a business, and for current restrictions on senior “policy making” executives who meet a salary threshhold. However, new noncompete restrictions even for senior executives are not permitted.
Are all Employer protections gone?
No. But thoughtful drafing is going to be needed.
The “noncompete clause” prohibited by the FTC rule includes any “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (a) seeking or accepting work in the U.S. with a different person or entity after the employment ends, or (b) operating a business in the U.S. after the employment ends.
Important restrictions on the activities of employees, independent contractors and others will remain and will be even more important to monitor and enforce.
Noncompete clauses that function during the term of work or employment are untouched. This may seem academic, but the specifics and enforcement will become more relevant. This is particularly true, since the implied threat of enforcement has traditionally been the strongest reason that an employee or contractor avoids future work that interferes with the former Employer.
Other worthwhile restrictions survive the FTC rule. For example, thoughtful use of Confidentiality Agreements and Non-Disclosure Agreements, including specifics for monitoring return of materials and information is necessary. These will become an essential Employer tool during and following a worker’s services in order to protect legitimate business interests. And, of course, every business should review Trade Secrets guidelines and practices to see that they are tightly drafted, implemented and available for enforcement when necessary.
The Upshot? Take Action Without Delay.
Waiting until an issue arises to review your policies and agreements is like ignoring an annual trip to the dentist and waiting until the tooth begins to hurt. Preventive care of your business interests is good practice that can avoid significant legal costs and frustrations later.
Attorney Marc Sherman recommends that every business pull out and dust off existing policy manuals, internal agreements, and external independent contractor agreements for a critical review. Also, consider whether new focus on Trade Secret protections, Confidentiality Covenants and other restrictive clauses need to be implemented or whether current policies can be reasonably beefed up.
Clients who would like to review the FTC rule will find it here: https://ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf
Anyone who would like to discuss how this important topic affects their business and business interests can contact Marc Sherman by email to msherman@mshermanlaw.com.