Many of you may have heard news reports that the Federal Trade Commission has voted to ban post-employment noncompete agreements nationwide. Although that proposed ban is likely to be paused indefinitely due to court challenges, this email addresses what constitutes a post-employment noncompete, what is proposed to be banned, when the ban may (or may not) take effect, and suggested next steps.
- What does the FTC regard as a noncompete? Those who are familiar with Georgia’s terminology may be aware that Georgia law contemplates four types of restrictions on employees and former employees: noncompetes that restrict competition within a specific geographic area; covenants not to solicit customers that restrict competition in the form of soliciting business from particular customers; covenants not to solicit, or poach, co-workers; and nondisclosure agreements that prohibit the use of particular types of information to compete. The FTC’s approach is to try to pull those restrictions into the umbrella of “noncompete”, focusing on the effect of the restriction on employees and independent contractors without regard to the terminology used. Regardless of how the restriction is phrased, if the effect of the restriction is to prevent the employee or independent contractor from working for someone else or operating a competing business after the employment or engagement ends, then it could be considered by the FTC to be a noncompete. Although close questions will have to be resolved with litigation, it is likely that any of the following restrictions may be considered by the FTC to be a noncompete:
- A restriction on where the former employee or independent contractor may work, including a restriction on work for specific competitors or work in a particular industry;
- A restriction on the former employee’s solicitation of business from the employer’s customers; or
- A restriction on the former employee’s use of the employer’s customer information or other information to compete. (Trade secrets and copyrighted information will still be protected, but it is possible that other types of competitive information may not be protected.)
- What is intended to be banned by the FTC?
- The FTC voted to ban nearly all post-employment noncompete agreements between employees and employers and between principals and independent contractors.
- The only exceptions are:
- Certain executive-level noncompete agreements that are already in existence may remain in effect until they expire of their own terms. But even executive-level noncompete agreements may not be entered into going forward.
- Certain noncompetes that are entered into in connection with a sale of a business will still be permitted, on the assumption that those agreements would have been bargained and paid for as a part of the sale.
- Noncompetes entered into by a franchisee in favor of a franchisor will still be permitted.
- Noncompetes that apply to an employee’s or independent contractor’s competitive activities during employment or during the engagement will still be permitted.
- Noncompetes between not-for-profit entities (which fall outside the FTC’s jurisdiction) and their employees or independent contractors.
- There are plenty of gray areas in which an employer’s efforts to protect its business interests may not clearly fall inside or outside the FTC’s interpretation of what is a noncompete. We can expect litigation over those gray areas if/when the ban goes into effect.
- Note that, if the FTC’s ban is permitted to take effect, the ban will supersede Georgia’s own laws and court decisions regarding post-employment restrictions except to the extent that Georgia may have laws or court decisions that are more restrictive than the FTC’s rule.
- When will the FTC’s planned ban take effect? The answer is a little fuzzy: sometime between Labor Day and never.
- The ban is scheduled to take effect 120 days after it is published in the Federal Register. Publication should occur soon, so the scheduled effective date is likely to be around Labor Day.
- Several industry groups have already filed lawsuits to challenge the ban on a variety of legal grounds. These groups have asked courts to enter injunctions stopping the ban from going into effect. What will happen next is a little unpredictable, but it seems likely that a court will temporarily stop the rule from taking effect at least as to some industries or categories of workers. If an injunction is entered, then some or all of the ban may be placed on hold indefinitely. If no injunction is entered, the ban will go into effect as scheduled.
- Looking into a crystal ball, my prediction is that the ban will initially be enjoined, or stopped from taking effect, at least as to certain categories of employees. It seems likely that a version of the ban will eventually take effect, but that may take several more months or even years and the version that ultimately takes effect may be narrower than the near-total ban approved by the FTC last week.
- I will continue to monitor potential litigation over the ban and will provide an update this summer as the effective date approaches.
- What should employers and employees do now? For now, most employers and employees don’t need to do anything other than watch and wait to see whether the ban may be stopped by a court before it goes into effect.
- If the ban does go into effect in its current form, employers will need to take affirmative action regarding existing noncompetes. Although I would be pleased to discuss that potential affirmative action with you at any time, there is no rush to discuss or plan that affirmative action while we await court rulings on the FTC’s ban.
- For employees and independent contractors, any existing noncompetes will continue to be evaluated for enforceability under Georgia law (and potentially enforced by Georgia courts) unless/until courts permit the FTC’s noncompete ban to take effect.
Final Thoughts. This is an uncertain time for employers and employees alike. This article provides general legal information that is not specific to any particular client’s situation and should not be relied on for legal advice. Decisions about the best course of action will depend on specific facts and circumstances that should be discussed with an experienced attorney.
