Non-Compete Agreements and the New FTC Rule

Having spent the first 20 years of my career as an employment attorney representing mostly plaintiffs, one of the recurring issues we dealt with was non-competes. Frequently employees signed a non-compete agreement while filling out new hire paperwork and never gave it a close read or a second thought. It was only when their employment ended, either voluntarily or involuntarily, that the non-compete became an issue. Often clients would assume that it wasn’t a big deal and that they could not be held to something that they did not understand or  had no recollection of signing. Unfortunately for them, they were wrong. In the jurisdictions that I practiced in, courts typically uphold non-compete agreements.

For employees, non-competes limit their ability to move freely within the workforce. They prevent employees from moving to better, higher paying jobs. They prevent employees from being able to relocate to other parts of the country or start their own businesses. While some employees choose to wait out the duration of their non-compete, this is not an option for everyone. Depending on the jurisdiction, courts have upheld non-compete agreements lasting anywhere  from six months to two years. Employees who choose to fight a non-compete often find themselves being sued by their former employer. In some cases, new employers are willing to pay the costs of a lawsuit but that was relatively rare in my experience.

When I read that the Federal Trade Commission (FTC) had issued a Final Rule prohibiting non-compete clauses in employment contracts my first thought was that this will change the landscape of employment law in a positive way for my former clients. The FTC estimates that almost 1 out of every 5, or approximately 30 million Americans, currently has a non-compete. By eliminating non-competes, employees will be free to take their unique skills and ideas to a company of their choice at any time.

Of course, with any rule or law there are exceptions. Non-competes will remain in effect for senior executives. Senior executives are those that make more than $151,164 a year and are in a policy making position. The FTC estimates that less than .75% of workers are senior executives, therefore the majority of workers will still benefit from this rule. The FTC does not have jurisdiction over all businesses including non-profits, banks, federal credit unions, and air carriers, so the rule will not apply to those industries. Finally, the rule will not apply to non-competes entered into as part of a sale of a business.

My second thought, after reading the Final Rule, was that businesses will not be happy about this rule and that litigation is sure to follow.  As of the writing of this article, at least two lawsuits have been filed. Therefore, even though the rule is set to take effect 120 days after publication, it will likely be much longer before we see the application of this rule to the workforce.