Looking for Certainty: Protection from competition following the FTC’s rule prohibiting non-compete clauses

Key Takeaways:

• Legal challenges to the validity and enforceability of the Rule have already been filed, leaving the future of the Rule’s ban on non-compete agreements in an uncertain space with litigation that may take years to conclude. 
• In the interim, businesses will want and need to continue to legitimately protect their confidential and proprietary information.  
• Examining what options are available during this uncertain time, including major points to consider when implementing and utilizing non-disclosure and non-solicitation provisions or agreements. 

On Tuesday, April 23, 2024, the Federal Trade Commission (FTC) approved a final Non-Compete Clause Rule banning as unfair competition all non-compete provisions entered with workers on or after the effective date of the Rule, which is scheduled to be 120 days following the Rule’s publication in the Federal Register. The FTC’s findings are that non-competes are restrictive, exclusionary and coercive conduct that negatively affects competitive conditions throughout labor, product and service markets. It is important to note that the Rule does not apply to nonprofits although the FTC intends to analyze each entity to determine whether it is truly a nonprofit.  

The Rule defines a “non-compete clause” to be a term or condition of employment that prohibits or prevents a worker from, or penalizes a worker for, seeking work in the United States with a different person, or operating a business in the United States, after the conclusion of employment to which the term or condition applies. “Workers” are defined to include a person who works or previously worked for an employer, with or without pay, regardless of whether the person is or was classified as “an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”

The Rule also provides that existing non-compete clauses will not be enforceable after the effective date, except for existing non-competes with “senior executives” defined as employees making at least $151,164 annually and who work in a policy-making position, meaning those who have final authority to make decisions concerning significant aspects of the business.  The Rule provides that employers will be required to provide notice to workers with existing non-competes that such provisions are no longer enforceable. 

Notable exceptions to the Rule’s applicability, where non-compete provisions will continue to be considered enforceable, include a franchisee in a franchisee-franchisor relationship and non-competes entered as a result of a bona fide sale of a business.   

Many businesses have utilized non-compete agreements or provisions as tools for a legitimate purpose – to protect confidential and proprietary information and practices from being directly utilized by a competitor as result of an employee walking out the door.  While the Rule is straightforward on non-compete clauses being banned upon the effective date, legal challenges to the validity and enforceability of the Rule have already been filed by the U.S. Chamber of Commerce and others, leaving the future of the Rule’s ban on non-compete agreements in an uncertain space. Other businesses and trade associations will follow suit. These legal challenges may result in a temporary restraining order or preliminary injunction that delays the effective date until the litigation concludes – a process which could take years.  

In the interim, businesses will want and need to continue to legitimately protect their confidential and proprietary information that has been shared with a departing worker during the course of work. 

So, what options continue to be available during this uncertain time of any challenges to the Rule banning non-competes?  The Rule does not ban non-disclosure and non-solicitation provisions or agreements, which should remain valid and enforceable so long as they do cross over into the FTC’s definition of “non-compete clause.” A non-disclosure agreement or provision (NDA) generally provides that a worker will not disclose or use certain confidential information for the benefit of a competitor. A non-solicitation agreement or provision (Non-Solicit) generally limits who a worker may contact (i.e., customers of prior employer) after he or she leaves a job.   

NDAs and Non-Solicits have often gone hand-in-hand with a non-compete agreement.  Given the current environment, and the highlighted importance of appropriate NDAs and Non-Solicits, businesses will want to review and update their existing NDAs and Non-Solicits, or start implementing these options, to provide appropriate protections when an employee with access to confidential business information leaves employment.   

Some major points to consider when implementing and utilizing an NDA are:

• Adequate Consideration. A required element for any contract to be enforceable is adequate consideration.  Some jurisdictions provide that new or continued employment is adequate consideration, while other jurisdictions require additional consideration, like a separate payment or promotion to a new position.  In either circumstance, a business will want to express in the written agreement what the exact consideration is and provide that the worker agrees the consideration is adequate for the commitment to abide by the non-disclosure obligations.

• Clearly Identify Confidential and Protected Information. What confidential information specific to your business does it really need to protect? This is different for every business, but there are some common objectives and standards for everyone. Ambiguous terms are often construed against the drafter or are found to be unenforceable. For this reason, “confidential information” needs to be clear and specific to the scope of an employee’s work and the type of business. The best definitions of what is confidential spell out the customer, pricing, financial, research and development, marketing strategy, intellectual property (patents, copyrights, trademarks) and business process information, as well as the formats in which it may be contained, that is confidential.  Many states have adopted a trade secrets act that provides statutory definitions and protections for misappropriation that should be considered in defining what is confidential.  An overboard definition of confidential information could infringe on and violate certain federal or state protections, like those provided to whistleblowers or workers with knowledge of sexual harassment disputes. Appropriate exclusions from confidential information should also be addressed, like information that could be obtained from the public domain or information that would prevent a worker from gainful employment, which would effectively make an NDA a non-compete. Similar to the issue of adequate consideration, it is always good to have a worker acknowledge in an NDA that he or she understands and agrees to the scope of protected confidential information.   

• Address Ownership of Work Product During Employment. It is common for technical or creative workers to be involved in creating work product that may be protected under intellectual property laws (patents, trade secrets, copyrights, etc.).  It is important to address the ownership of such intellectual property during and following employment, which can often be addressed through “work for hire” and assignment of right provisions.  

• Non-Disclosure Parameters. A good NDA clearly states the obligations of a worker to protect confidential information, the process to be followed before any confidential information can be shared, and the appropriate circumstances in which any confidential information may be shared with other employees or third parties.  It is also a good practice to define a process for addressing the reporting and mitigation of any improperly disclosed confidential information.  

• Steps Upon Termination of Employment. Inasmuch as a primary goal is to prevent the misuse of confidential information after employment is terminated, most employers will want to provide in the NDA that the non-disclosure obligations of the employee survive termination.  It is also important to establish a thorough process for the return and collection of all confidential information a worker may have, and an acknowledgement of compliance from the worker.   

• Time Limitation on Restrictions. While most states do not limit the timeframe an NDA can be applicable, some do.    Certain categories of confidential information may comfortably be removed from the protected category after the passage of a certain amount of time, making compliance and related oversight simpler by providing a time limitation on the non-disclosure obligations.  Certain categories of confidential information may need to retain the status of being confidential indefinitely.  Addressing these issues on the front end is necessary to strike the right balance of protection.   

• Legal Remedies if Breach Occurs. The misappropriation of confidential and proprietary business information can have devastating effects, and a business’s primary goal in this circumstance is usually to make the misappropriation stop through injunctive relief while also preserving the right to seek various damages that may be incurred.  The timing to obtain such relief can be critical, and businesses often give consideration to provisions providing for injunctive relief to be sought in court and whether arbitration would be appropriate for the resolution for other relief.   

Many of these considerations are also relevant to Non-Solicits. Other points to address include:

• Clearly Identify Prohibited Contacts. Non-solicitation provisions covering existing clients, especially those who the employee interacted with, are almost always acceptable.  Many agreements limit the provision to clients or potential clients known to the employee during a certain period of time prior to the employee’s departure. Other agreements identify specific clients who are off limits. Agreements may also cover vendors and suppliers.  

• Time Limitations. Unlike NDAs, Non-Solicitation agreements must contain a reasonable time period. They usually include the period of employment in addition to some period of time following separation of employment.    

• Geographic Limitations. Some states require that Non-Solicits be limited in geographic scope. Other states permit a blanket prohibition against soliciting existing clients to substitute for the geographic scope. 

• Define Solicitation. What actions are considered solicitation? Direct or indirect contact? Is it important to include actions which would tend to divert a certain customer’s business away from the company. It is generally acceptable for a former employee to announce their plans or new employment on a social media platform or through a general advertisement.  

• Choice of Law. Specify which state’s law applies to the agreement and verify that the agreement does not conflict with the state’s law. 

• Severance/Reformation. Many entities include a severance provision which states that if any provision of the agreement is determined to be unenforceable it does not affect the enforceability of the remaining provisions. Similarly, it is wise to specifically permit a court or arbitrator to rewrite an agreement so that it is enforceable to the greatest extent possible. 

The future of non-competes is uncertain, but certain appropriate options remain to assist your business in protecting its confidential competitive information.