On April 23, 2024, the Federal Trade Commission (FTC) followed through on its promise in January of 2023 to ban the enforcement of noncompete agreements between employers and employees. However, a federal judge has since set aside the ban. The matter be appealed to the Supreme Court, most likely.
But what does this mean?
Passing Constitutional Muster
The United State Supreme Court will likely find the FTC’s ban on noncompetes unconstitutional, since only Congress — not the President or the FTC (within the President’s executive branch of government) — can pass a new law, such as a ban on non-compete clause enforcement.
Rather, in our system of separation of powers, with co-equal branches of government, the executive branch is only supposed to enforce the law, not pass new laws. As such, many scholars believe the FTC’s ban will likely fail in the courts, ultimately.
But until then, what happens?
The Short Run Implications
Many companies — and judges — will treat the FTC’s new “law” as legit, until an appellate court determines otherwise. But notwithstanding the ban, the FTC has presented several “alternatives” for employers to attack former employees through the courts — to make their lives very difficult, apart from non-compete enforcement.
Per the FTC’s website:
Alternatives to Noncompetes
The Commission found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete.
Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA.
Likewise, non-solicitation agreements will remain in full force and effect, notwithstanding the FTC ban on noncompetes. Thus, employers will remain free to use the courts to test whether a former employee has refrained from soliciting her former employer’s customers or workers to associate with a competitor.
What Must Employers Do Right Now?
What happens to existing non-compete agreements? Do they need to be re-written? Here’s what the FTC had to say:
[T]he Commission has eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change will help to streamline compliance.
Instead, under the final rule, employers will simply have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future. To aid employers’ compliance with this requirement, the Commission has included model language in the final rule that employers can use to communicate to workers.
Rationale For the New Rule
The FTC reasons that noncompetes unfairly hurt workers who often have less bargaining leverage when taking a job with an employer. The noncompete be will supposedly help workers — and the labor market in general — by reducing barriers to employment to help workers earn a fair wage.
Sale of a Business: An Exception
A person selling a business often agrees not to compete with the purchaser of his business. This type of non-compete will remain enforceable, notwithstanding the FTC’s ban. The FTC assumes that the seller of a business has sufficient bargaining leverage such that it would be “fair” to enforce a noncompete against him.
Effect at the Executive Level
According to the FTC, here’s how executives will be treated under the new rule:
Under the final rule, existing noncompetes for senior executives can remain in force. Employers, however, are prohibited from entering into or enforcing new noncompetes with senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.
Look for More Litigation — Not Less — On the Horizon
Businesses do not like to be told what to do. Nor do they enjoy seeing their workers — and trade secrets — walk out the door, ultimately for the benefit of a competing business. Therefore, look for educated employers to litigate and/or enter into new agreements with workers to:
-
-
-
- Emphasize Trade Secret importance,
- Include extensive Non-Disclosure Agreement (NDA) language,
- Require Workers to Pay Employers for Training, especially if the worker takes a job for a competitor,
- Provide financial incentives to workers for them to refrain from taking a job for a competitor, such as a severance package contingent on the worker refraining from working elsewhere for a period of time, and/or
- Prohibit solicitation of customers or employees of the employer.
-
-
In fact, many businesses already took the above measures as far back as January of 2023, when the FTC signaled it was leaning toward banning non-compete enforcement. In fact, trade secret protection exists by statute and common law even without a written agreement for you to protect such your employer’s “sensitive” information.
So do not expect your employer to simply accept you taking a job for a competitor at the risk of you sharing “trade secrets” with a competitor, even if the FTC has deemed your noncompete as invalid.
Contact our Pittsburgh Lawyers Today
The news of the FTC ban on non-competes has spread quickly.
But skip the speculative and breathless reporting. Contact a Pittsburgh lawyer to truly understand any litigation claim or defense in Western PA.
412.342.0992
