Non-Compete Clauses Banned!

This week, the Federal Trade Commission (FTC) voted 3-2 to pass a rule banning nearly all existing and future non-compete clauses with employees (including new agreements with senior executives). The new rule states that such clauses are an unfair practice. This rule would apply nationwide and would supersede state laws that permit non-compete clauses in employment contracts.

Non-Compete Clause Background

Non-compete clauses prevent an employee from working in a competing business – typically they will be limited based on geography (not in our town), field (not in our industry) and time (not for a certain period of time). Non-compete clauses are typically used when a business invests in an employee’s education, or gives the employee access to trade secrets that could be used by the business’ competitors. They are intended to allow the business to share education and trade secrets with a employee without worrying that the investment will inure to the benefit of a competitor if the employee leaves. They have historically incentivized investing in the employees.

But non-compete clauses can also tie an employee to their employer, which can also undermine efforts to increase wages through labor competition.

Aviation companies have historically used non-compete clauses in a variety of ways to protect their interests. They may be used to protect trade secrets, like customer lists, customer usage data, or customer confidential information. They may be used to protect proprietary manufacturing information. They may be used to ensure that a competitor does not get the benefit of an investment that the business has made in a particular employee, such as when the business has paid for the employee’s education.

Under the new regulation, businesses will still be able to protect their interests through contracts with employees, but the contracts be precluded from restricting the employee’s opportunity to work for a competitor. Limiting immediate change to a competitor has typically been viewed as an effective way to protect against misappropriation of trade secrets by an employee and the employee’s new employer. It may be a more difficult effort to prove that an employee who has gone to a a competitor has stolen the prior company’s trade secrets.

The Rule

No new non-compete agreements will be permitted after the rule’s effective date. Existing non-competes clauses with workers other than senior executives will not be enforceable after the effective date of the final rule.

There is a special rule for senior executives (employees earning more than $151,164 annually who are in a “policy-making position”). For senior executives, pre-existing non-compete clauses (predating the final rule effective date) can remain in force.

Notice Requirements

If you have existing agreements that violate the new rule, then you may be required to give written notice to the employees (including former employees) who are affected.

Exceptions

The rule will allow a non-compete clause to be part of a business sale agreement. The new rule does not extinguish causes of action for breach of a non-compete clause when the breach occurs before the effective date of the rule.

Increased Labor Costs

The FTC specifically predicts that this rule will lead to an increase in worker’s wages, as companies use higher wages to lure talented employees from their competitors. This could be difficult for businesses that have to pay more for talent, while at the same time potentially losing the trade secrets that help keep that business competitive. There s a strong likelihood that this will disincentivize employers from investing in their employee’s education, because it will be a better use of the funds to simply pay the funds as wages in order to discourage the employees from leaving for a competitor’s better offer.

Summary

• After the effective date of the rule, don’t include non-compete clauses in future employment contracts, handbooks/manuals, or other resources.
• If your business has active non-compete clauses on the effective date of the rule, then you will need to give written notice to those current and former workers (except “senior executives”) that their non-compete clauses are unenforceable.
• Notice will not be not required for senior executives with pre-existing non-compete clauses because their pre-existing non-compete clauses are not affected; but make sure that the executives meet the legal requirements for a “senior executive.”
• After the effective date of the rule, businesses may not enforce non-compete clauses (other than for allowed senior executive clauses) but they may continue to enforce for violations of those clauses that occurred before the effective date of the rule.

The new rule will come into effect 120 days after its publication in the Federal Register. This new rule has not yet been published in the Federal Register. It is expected to be published next week. A pre-publication draft of the final rule is available on the FTC’s website. FTC has also published a Fact Sheet that summarizes the new rule.