(This column originally appeared in Entrepreneur)
Key Takeaways
- What is the future of non-compete agreements? Here’s what employers need to know amid legal uncertainty.
Last April, the Federal Trade Commission issued its final rule banning most non-compete agreements that took effect after September 4, 2024. At the time, many of my clients were very concerned about this because non-compete agreements, or clauses in existing employment contracts, have been a standard way to protect their companies if an employee leaves their business and goes to work for a competitor. This could potentially lead to the employee taking trade secrets and other proprietary information with them.
But there is good news for employers.
For now, everything’s on hold. That’s because of a July ruling by the U.S. District Court for the Northern District of Texas, which was finalized on August 20 and “prevents the FTC from enforcement of the rule against any company nationwide.”
But employers shouldn’t get too excited too quickly. The non-compete issue isn’t over. Far from it, in fact. According to legal site JD Supra: “It is unclear when — or if — the FTC’s Final Rule banning non-competes will take effect. The FTC has indicated it may appeal this decision. Such an appellate process will likely take months, if not years, to conclude and could ultimately end up before the U.S. Supreme Court.”
If you own or run a business and use non-compete agreements or clauses in your employment contracts, how do you proceed? Here are three important things to keep in mind.
Related: What Employers and Employees Need to Know About These Tricky Parts of Employment Agreements
November’s election could change things
The Federal Trade Commission, under the leadership of Lina Khan, who was appointed by President Biden in 2021, has pushed hard for the non-compete ban as “unfair methods of competition” under the 1914 Federal Trade Commission Act. However, the Texas ruling doesn’t interpret these types of arrangements as unfair competition or that the FTC has the authority to rule on such a matter. And it won’t help that a recent Supreme Court decision — known as the Chevron Deference — will also give more power to the courts to decide how federal agencies like the FTC interpret and implement laws.
However, the November 2024 elections will still significantly impact the future of non-compete agreements. Vice President Kamala Harris has previously stated that she supports the ban. If she wins and has a congressional majority, we could see more enforceable legislation making these types of agreements unlawful, which would be much harder to overturn in the courts. However, if former President Trump prevails in November, it is mostly certain that his FTC will not pursue this ban, and things will be left as is for at least the next four years.
Many states already have non-competes
Non-compete bans are not new. California, Minnesota, North Dakota and Oklahoma have full bans on non-compete agreements. California’s law is among the toughest — banning non-competes for all employers, regardless of executive compensation. Nine states and D.C. have restrictions on non-competes based on an employee’s income level. A total of 25 states have other restrictions on non-competes, while 12 states have no restrictions. Most of these states, however, usually exempt non-compete agreements from being used in the sale or dissolution of a business.
State and other local laws, if more prohibitive, will usually take precedent over any federal rule. The federal rule from the FTC is just that: a rule. It’s not law. The states mentioned above have mostly passed laws banning these types of agreements.
It’s important that you check with your state to see what laws they have concerning non-compete agreements.
Related: The FTC Is Banning Noncompetes — Here’s What Happens If You’re Currently Bound to One
You don’t really need a non-compete
Just think about it: why do you want a non-compete? It’s so that someone — a salesperson or a key executive — doesn’t leave your company and take your proprietary information with them. Most of my clients admit that if a person finds a better job somewhere else, even if it’s a competitor, then fair enough — you can’t blame someone who leaves for a better opportunity, whatever the reason. But you can blame someone if they take your company’s intellectual property because that can really hurt your business. What you really need isn’t a non-compete agreement. It’s a bulletproof confidentiality or non-disclosure agreement or NDA.
Such an agreement not only defines what you consider your intellectual property to be (i.e., customer lists, vendor cost agreements, employment contracts) but clearly prohibits an employee from sharing this information outside of your business for a specified period of time with very strict guidelines and penalties for violating such an agreement. Many of my clients are revisiting these agreements in the wake of the uncertainty surrounding non-compete and making sure that they’re ironclad. You should be doing the same. Talk to an attorney and make sure that your key employees sign on. If they choose to leave your company for a competitor, so be it. But woe be to them if they also choose to share your company’s innermost secrets with that competitor.
It’s safe to assume that the non-compete issue won’t be a big issue for the foreseeable future. But it’s not going away. As business owners, we always need to think ahead.
