The Federal Trade Commission on April 23 banned employers from using noncompete clauses, which the agency said suppress wages, stall new business formation and stifle companies from hiring the workers they need to grow.

The measure, approved by the agency’s Democratic majority on a 3-2 vote, prohibits companies from enforcing existing noncompete agreements on anyone other than senior executives. It also bans employers from imposing new noncompete contracts on senior executives in the future.

The nation’s biggest business lobbying group promptly moved to block the rule. In a suit filed in federal court in East Texas, the U.S. Chamber of Commerce and other business  groups argued the federal government has never regulated noncompete contracts and Congress never authorized the FTC to do so.

The FTC says nearly one in five American workers is affected by noncompete clauses.

Here is what you need to know about noncompete clauses and what to keep in mind before signing.

What is a noncompete clause?

Noncompete clauses prohibit departing workers from sharing trade secrets or proprietary information with new employers, or from taking proprietary information, such as customer lists, and using it to establish their own business.

When used, these clauses are typically contained in a longer employment agreement that a worker signs. The clauses usually apply for a period of time, such as a year or two years, or to a geographic area.

Why is the FTC banning them?

The FTC says noncompete agreements violate a 110-year-old law that prohibits unfair methods of competition.

FTC Chair Lina Khan said the rule restores rights to Americans that corporations have taken by imposing noncompete clauses in the workplace. “Robbing people of their economic liberty also robs them of all sorts of other freedoms,” she said.

Why would a business have a noncompete clause?

Many companies say that noncompete agreements are necessary to protect trade secrets, which can include confidential information such as customer data as well as intellectual property such as technical formulas and processes.

The Chamber of Commerce says policymakers and courts have long recognized the value of noncompete agreements, while state governments have put curbs on them “when they go too far.” The federal government has never regulated noncompete contracts, the Chamber says, and Congress never authorized the FTC to step in and take over for the states.

What kinds of workers are most likely to be affected by noncompete clauses?

Noncompete clauses have commonly been included in the employment contracts of executives, salespeople, scientists and others with access to confidential or proprietary information. Over time, they have been applied to larger swaths of the U.S. workforce, including blue-collar workers. Regulators, researchers and journalists have documented noncompete clauses applied to janitors, baristas, hair stylists, schoolteachers and entry-level workers.

Who does the FTC’s ban affect?

The measure only permits current noncompete agreements with senior executives, which the FTC defined as people earning more than $151,164 annually who have policymaking responsibilities at an organization.

What should you ask yourself before signing a noncompete clause?

First, research your state’s regulations regarding noncompetes. Then ask the following questions, ideally in consultation with an attorney:

Is it reasonable?

Is it enforceable?

Is it negotiable?

What do state laws say about noncompete agreements?

Most states limit noncompete clauses in some way or require that the agreements contain reasonable restrictions, which leaves them open to courts’ interpretations. A handful of states, including California, Oklahoma and North Dakota, hold that the clauses are unenforceable in all or nearly all employment contracts. Other states, such as Colorado, Illinois, Maine, New Hampshire, Oregon and Washington, ban them for workers earning below a certain wage threshold.

Even in states where the clauses would be voided by courts, companies still add them because they expect few employees to challenge them, researchers say.

Can you get out of a noncompete clause?

A noncompete clause can be challenged in court, and a judge may find that a clause’s restrictions are unreasonable and therefore unenforceable. But many workers lack the information or resources to hire a lawyer, opponents of noncompete clauses say.

What are the consequences if you break a noncompete clause?

Companies don’t always enforce their own noncompete clauses. But if they choose to, they can seek an injunction forcing you to honor the noncompete. They can also sue former employees to force them to turn down job offers, quit new jobs, or close a new business they have opened. In some cases, employers are awarded monetary damages if they can prove they have been hurt by an employee’s decision to join a new firm or start their own business.

Do employers ever sue each other over noncompete clauses?

Yes. While a company might sue its former employee for breach of contract or misappropriation of confidential information when enforcing a noncompete, it can also sue that person’s new employer for tortious interference, saying that the company interfered with a contract between the individual and the former employer.

Sometimes, such as when a new employee is especially valuable or brings hard-to-find skills, a new employer will agree to indemnify the individual, covering any liability or costs related to an existing noncompete agreement.

How common is it for noncompete clauses to be enforced?

There are many examples of high-profile companies turning to the law to enforce noncompete clauses. For example, has sued former employees for taking jobs at competitors, including Alphabet’s Google. A lawsuit against a former executive at Amazon Web Services, Amazon’s cloud-computing unit, was reportedly settled several months after it was filed in 2020, and the executive was ultimately allowed to join Google.

International Business Machines also has filed lawsuits seeking to prevent former executives from taking jobs with rivals. In 2008, it sued a vice president who had agreed to take a leadership role at Apple. And in 2018, it sued its former chief diversity officer, who had accepted the same job at Microsoft. Both cases were settled, and the executives eventually moved to their new jobs.

Are there alternatives to noncompete agreements that can help companies protect their confidential information?

Companies do have other tools at their disposal to protect trade secrets and confidential information. The Uniform Trade Secrets Act, which has been adopted by nearly every state, allows businesses to sue other companies or individuals if they feel that proprietary information has been stolen. As lawyers point out, however, the laws apply only after information has been misappropriated, and companies must have some evidence that confidential information was stolen or misused.

Companies also can use nondisclosure agreements, which have a similar effect of protecting information but don’t prohibit a person from taking a job or starting a business.

Employers can also use carrots instead of sticks to win workers’ loyalty and discourage them from leaving, lawyers say. Examples include deferred compensation agreements, retention bonuses and rolling stock options that vest after a set amount of time.

Source: April 24, 2024 | By Lauren Weber