By Jeff Schagren and Richard Cheng, Ritter Spencer Cheng PLLC
In what is already turning out to be a busy year in the labor and employment sector, the United States Federal Trade Commission (FTC) by a 3-2 vote elected to pass a rule that invalidates all non-competition clauses in employment agreements. The rule will be effective 120 days after publication in the Federal Register.
The rule is already facing legal challenges and it is likely more will come. Soon after the vote was announced, the tax services firm Ryan, LLC filed suit in Federal Court in Texas alleging the “Non-Compete Rule far exceeds the Commission’s authority under the FTC Act.”
Nevertheless, unless prevented from taking effect, the rule will be partially retroactive. Specifically, except for senior executives (defined as workers earning more than $151,164 annually who are in a “policy-making positions”), all non-compete clauses will be invalid. However, existing non-compete clauses in employment agreements (or a standalone agreement) for senior executives will still be enforceable. After the rule’s effective date, non-competition clauses will be invalid for all workers at any level.
This was a long time coming. In 2021, President Biden directed the FTC to ban or limit non-competition agreements. California, Minnesota, Oklahoma and North Dakota have already banned non-compete agreements and many other states have limited their use. Federal and state courts have frowned upon non-compete clauses that were not limited in scope, specifically as to time and geography.
However, this does not mean employers do not have options as noted by the FTC itself. Employers who have not done so already should be adding strong trade secret, non-disclosure and confidentiality agreements as standalone agreements, to their handbooks and employment agreements. Trade secret agreements and clauses should include language notifying employees of their risks if they violate the federal Defend Trade Secrets Act (DTSA).
Non-solicitation clauses may still be effective, however be sure to check your state law regarding enforceability (for example non-solicitation clauses are void and unenforceable in California). Even in states where they are enforceable, non-solicitation clauses need to be carefully drafted to avoid being interpreted as a non-compete clause in disguise.
Moreover, it should be noted there are exceptions to the final rule, including but not limited to:
- The final rule will “not apply to a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets,” regardless of the amount of equity owned by the restrained person. Non-competes that part of covered transactions may still be enforceable.
- The final rule will not apply “where a cause of action related to a non-compete clause accrued prior to the effective date.” For example, if an employer enforced a non-compete before the final rule’s effective date, the final rule will not retroactively be applied to dismiss the enforcement action.
- The final rule defines the term “worker” to include a natural person who works for a franchisee or franchisor, but not a franchisee in the context of a franchisee-franchisor relationship.
Finally, if you have an employment agreement with a non-compete clause, it is unlikely that the entire employment agreement will be invalidated. While employers may wish to consider issuing new employment agreements and should be reviewing and updating employee handbooks, both well drafted employment agreements and handbooks have a severability clause, i.e. language specifically stating that if one clause in an agreement (or handbook) is found to be unenforceable or illegal the rest of the document remains effective.
Jeff Schagren is an attorney with Ritter Spencer Cheng who represents employers across industries in all labor and employment matters, as well as general corporate issues, transactions and litigation. Jeff Schagren: Senior Counsel | Ritter Spencer Cheng
Richard Y. Cheng is a managing member at Ritter Spencer Cheng PLLC, who brings a wealth of experience and expertise in corporate transactions, regulatory matters and has a certification in healthcare compliance (CHC) through the Certification Compliance Board (CCB). https://ritterspencer.com/richard-y-cheng/
At Ritter Spencer Cheng, our team handles highly contested and complex labor and employment matters. We are intensely attuned to the challenges our clients face on a day to day basis, and the need to balance legal options against business strategies. Ritter Spencer Cheng PLLC offers a blend of expertise and dedication in this challenging landscape, particularly on the management side of employment matters. https://ritterspencer.com/labor-and-employment-attorneys-dallas-tx/
This article is for informational purposes only and does not contain legal advice. Please consult with your attorney for any questions.
