Are Non-compete Agreements a Thing of the Past?

At some point in your career, you may have been asked to sign a non-compete agreement restricting you from competing with your employer after the employment period ends. This is a legal agreement, often found in offer letters or as a condition of compensation in severance agreements.  It also prohibits you from revealing proprietary information or secrets to other parties during or after employment.

Non-complete agreements may apply to both employees and independent contractors and vary in content. Typically, they restrict employees from working for a company’s competitors for a period of time within a specified geographic area after the worker leaves the company. However, many non-competes lack clarity in specifying which companies are deemed as competition.  In addition, in this age of remote work and global business engagement, geographic areas can be extremely broad.

The Federal Trade Commission, under a “final rule” approved earlier this month, established a nationwide ban on non-compete agreements.  

• The rule bans all new “geographic” non-competes that impose restrictions on future work locations or start dates.
• It blocks enforcement of existing non-competes for all workers other than current senior executives.
• The final rule takes effect 120 days after publication in the Federal Register. It bans employment noncompete agreements with all workers, including senior executives, according to the FTC. Prior to the effective date, employers must inform workers that existing non-compete agreements are no longer in effect and not enforceable.

A Reality Check

Existing non-compete agreements may apply to employees, contractors, and consultants.  When an employer legally enforces a non-compete agreement, courts consider whether the agreement protects the employer’s legitimate business interests, whether time limitations and geographic restrictions are reasonable, and whether you are being compensated for agreeing not to work for a competitor.  Offers of employment from competitors are usually withdrawn when litigation is threatened.

Today, the validity and enforcement of non-compete agreements vary by jurisdiction. Even before the Final Rule was issued, California, North Dakota and Oklahoma did not enforce noncompete agreements.

Why it Matters

The FTC’s ruling was basd on a determination that non-compete agreements suppress U.S. economic growth.  The FTC Chair Lina Khan stated, ““Noncompete clauses keep wages low, suppress new ideas and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned. The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market.”

An estimated 30 million U.S. workers are subject to non-competes.  The FTC estimates the ban on non-competes will lead to an annual growth in new business formation of 2.7%, resulting in more than 8,500 additional new businesses created each year and an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years.

By freeing workers to pursue opportunities within the same industry and geography, the FTC projects estimated earnings increasing for the average worker by an additional $524 per year.

The Backstory

The Final Rule does not ban client non-solicitation agreements during employment and it does not apply to non-competes entered into by a person in the sale of a business entity.

It also does not ban post-employment agreements regarding confidentiality, client non-solicitation, employee non-recruitment, or reasonable reimbursement of training costs. However, post-employment obligations cannot be so restrictive as to be de facto non-competes subject to the ban.

Opposition to the Final Rule is substantial.  The US Chamber of Commerce has vowed to sue the FTC to block the rule, challenging their right to issue the ban and stating that non-compete restrictions can only be imposed by the States.

Many staffing agencies have also voiced their opposition, as non-compete agreements are used by virtually all staffing firms to retain and reassign talent at the completion of each client engagement.

The Path Forward

Now is the time to review existing employment agreements and related documents to determine whether any state or imply that you are currently bound by a non-compete agreement. 

• If you have any questions regarding current agreements, have a knowledgeable legal counsel review the documents.
• If you are a senior executive, your non-compete agreement may still be enforceable.
• Remember that this new rule applies only to non-compete agreements.  Trade secret laws, nondisclosure agreements, and training-repayment agreements requiring you to reimburse an employer or third-party for training costs if your employment terminates within a certain period remain fully enforceable.
• The company you are doing business with as an employee or independent contractor must notify you that the non-competes will not be enforced.
• You may be asked to negotiate and sign a revised employment agreement that complies with the final rule. 

In every case, you and the company engaging you should remember that the most effective protection comes from a supportive work environment, challenging assignments, and equitable compensation.