FTC Bans Non-Compete Agreements

Non-compete agreements may be a thing of the past under a rule adopted by the Federal Trade Commission (“FTC”) on Tuesday.

In a seismic shift in the field of employment law, the FTC, in a 3-2 vote, approved a final rule banning the majority of non-compete agreements nationwide. The rule is scheduled to go into effect 120 days after it is published in the Federal Register.

The U.S. Chamber of Commerce and other entities are expected to file suit as early as today in an effort to block the new rule.

The measure applies to most post-employment non-compete agreements in the workplace – including non-compete provisions found in employment contracts – that prevent employees, independent contractors and others from working for direct competitors.

The FTC defines a non-compete clause as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The FTC intends for this definition to be construed liberally, and bars any contractual term that limits an employee’s ability to find gainful employment at the conclusion of his or her employment.

The following are key provisions of the FTC’s final rule:

• Existing non-compete agreements are permitted to remain in effect for senior executives only. A “senior executive” is defined as an employee earning more than $151,164 annually who is in a policy-making position, which includes a business entity’s president and chief executive officer.
• New non-compete agreements are banned for all employees, including senior executives, following the effective date of the rule.
• All employers who have existing non-compete clauses with employees, or who are enforcing non-compete clauses against former employees, must provide “clear and conspicuous” written notice to their current and former employees that the non-competes are no longer binding. However, formal rescission of existing non-compete agreements is not required.
• Non-compete agreements are permitted in connection with the sale of businesses.
• The rule applies to post-employment non-compete agreements and not to non-competes that prohibit an employee from competing against an employer while still employed.
• The rule does not apply to non-compete clauses for any employee who owns at least 25% of an employer’s business.

The final rule supersedes state statutes and state decisional law that permit non-competes. In Pennsylvania, while some court decisions comment on non-competition clauses being disfavored, the Pennsylvania Supreme Court has held that non-competes and other restrictive covenants “are enforceable if they are incident to an employment relationship between the parties;  the restrictions imposed by the covenant are reasonably necessary for the protection of the employer;  and the restrictions imposed are reasonably limited in duration and geographic extent.” Hess v. Gebhard & Co. Inc., 570 Pa. 148, 157, 808 A.2d 912, 917 (2002).

The FTC rule appears limited to non-competes and does not appear to affect other restrictive covenants imposed by employers, including non-solicitation provisions. Employers may still be permitted to enforce contract terms that prevent employees from soliciting an employer’s clients, and that protect an employer’s trade secrets and other proprietary information. The FTC states that whether any given contractual provision constitutes a “non-compete clause” is a “fact-specific inquiry.”

“Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information,” the FTC said in a press release.

The final rule applies to entities subject to the FTC Act. The FTC Act does not apply to non-profit corporations, such as health care companies. However, published reports indicate that certain non-profit, tax-exempt entities that are organized for the profit of members may be subject to the rule.

According to the FTC, 30 million people – roughly one in five workers – are now subject to non-compete agreements.

Companies that violate this rule may be subject to civil penalties, which have not been spelled out.

For more information about how this final rule may impact your employment contracts, or if you need guidance on complying with this new rule, call us at 412-209-3200 or contact us to schedule a free, no-obligation consultation.