by Katherine M. Flett
The FTC’s rule banning most non-compete agreements goes into effect September 4, 2024. Before then, employers with qualifying employee non-compete agreements in place must provide written notice to current and former workers that their non-compete agreements will no longer be in effect. Given the potential of the ban to dramatically alter employer-employee relationships and the security of proprietary information, businesses should take steps to mitigate the possible consequences of the ban before September.
While there are several narrow exceptions to the ban, the most significant is the “senior executive” exception, which excepts pre-existing non-compete agreements with senior executives. The rule defines “senior executive” as an employee earning more than $151,164 annually (inclusive of salary, commissions, and other nondiscretionary compensation) in a “policy-making position.” The FTC defines a “policy-making position” as: (1) the President, CEO, or equivalent; (2) any other officer with policy-making authority (Vice President, Secretary, Treasurer, CFO, comptroller, or principal accounting officer), or (3) any other person with policy-making authority. The third prong of this definition will likely be left to the interpretation of courts. The FTC estimates this exception will apply to less than 1% of all employees.
Several lawsuits are pending against the FTC seeking a nationwide stay and injunction against enforcement of the final rule, with mixed initial rulings. No nationwide stay has issued as this is written.
Businesses should consider alternative tools to protect their proprietary information such as trade secret enforcement and/or non-solicitation agreements. Trade secrets include any propriety information from which a business derives value by restricting the general public/competitors’ access to such information.
Missouri and many other states have adopted the Uniform Trade Secrets Act, which prohibits the disclosure of trade secrets to third parties without consent. A business can recover the actual loss caused by misappropriation of trade secrets, any unjust enrichment to the employee or former employee, punitive damages, and reasonable attorneys’ fees. Injunctive relief may also be available. Employers can implement confidentiality and nondisclosure agreements to further safeguard trade secrets and other sensitive information.
Non-solicitation agreements are unaffected by the FTC ban. These solicitation agreements prevent former employees from soliciting business from their previous employer’s customers or soliciting other employees to leave employment. The terms of such agreements must be “reasonable” to be enforceable in court. Typically, a non-solicitation agreement prohibiting an employee from soliciting customers they were in contact with while employed by the company for a period of two years is considered reasonable. However, unlike a non-compete agreement, a non-solicitation agreement does not prevent a former employee from seeking job opportunities with competitors. Regardless, non-solicitation agreements can help fill the void left by the elimination of non-competes by protecting your customers and talent at your company.
As the ban on non-compete agreements gets closer, it is critical for businesses to consult with legal counsel to navigate this new ban effectively.
Authored by Katherine M. Flett with assistance from Jack Stiens, contributor.
Katherine M. Flett is a member of the litigation team whose primary focus is on assisting clients in insurance defense, business litigation, employment law, transportation and trucking law, and bankruptcy matters. Katherine can be reached at 314.889.7182 or kflett@dmfirm.com.