07/10/2024
There is a pervasive belief that non-compete agreements are not valid or have been severely weakened. This is not true. Non-compete agreements have not gone away, yet, at least not in Florida. Their future remains uncertain due to a new Federal Trade Commission (FTC) rule, but non-compete agreements remain valid and enforceable, especially in Florida. Let’s take a look at the current state of the law and what might happen if non-compete agreements become unlawful.
What exactly is a non-compete agreement?
A non-compete agreement is a contract that prohibits an employee from working for a competitor, usually for some period of time after her employment ends. For example, a commercial insurance agency in Lakeland might ask its agents to sign a non-compete agreement. It could prohibit the agent from working for a competing local agency for two years after their employment ends, for example. Non-compete agreements are used in many other industries, but they are especially common in careers where workers have one-on-one personal relationships with clients that the employer wants to protect, such as sales professions and medicine, and in high-tech companies with a lot of innovation and trade secrets to protect.
What about the new rule?
In April, 2024 the FTC issued a rule banning most non-compete agreements in the US, which is scheduled to become effective September 4, 2024. (The rule includes exceptions, such as for certain highly-compensated executives and for sellers of businesses.) The rule was promulgated pursuant to the Federal Trade Commission Act of 1914, which declares that “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” The act authorizes the FTC to engage in rulemaking to implement and enforce the statute.
In its new rule, the FTC found that non-compete agreements are, in and of themselves, an unfair method of competition because, among other reasons, they prohibit businesses from hiring employees on more favorable terms than their competitors. Therefore, banning them is consistent with its statutory authority, at least according to the FTC.
There have already been several lawsuits challenging the FTC’s authority to issue the rule. The plaintiffs, various businesses and business groups, claim that the rule exceeds the authority that Congress intended to grant to the FTC. Preliminary decisions are imminent. No matter the result, the decisions will almost certainly be appealed, setting up a lengthy wait before there is any finality. It is quite possible that the effective date of the rule will be stayed pending resolution of one or more of the lawsuits. No one can predict the future, but we are pessimistic that the rule will take effect. This prediction is bolstered by a very recent Supreme Court case that instructs courts to give less deference to an agency’s interpretation of its enabling statute.
In the meantime, employers who rely on non-compete agreements, and employees who are subject to them, would be wise not to assume they will disappear. Simultaneously, it would be prudent to consider what might happen if they do.
How can a business prepare for non-compete agreements becoming unlawful?
First, it helps to have a bit of perspective about whether a non-compete is doing much for you to begin with. In our experience, enforcing a non-compete agreement is often a double-edged sword for employers, especially small businesses that make up the bulk of our clients. These lawsuits are distracting and expensive. The discovery process can alienate clients, further decreasing the likelihood that the business will ever recover any business lost. Non-compete lawsuits are often driven by emotion and anger at the departing employee, but then fizzle out and settle as both sides lose interest in paying lawyers. Resentment over the agreements can also negatively affect the morale of current employees. Even if non-competes disappear, turnabout will be fair play: you may be more likely to lose an employee who do not want to work for you, but you will have more freedom to hire one away from your competitor who does. Their demise is not necessarily the end of the world.
Second, a business can strive to make them unnecessary, by:
- Making sure that no one person in your organization is invaluable to a particular process or client, so the departure of someone is unlikely to result in the loss of business or institutional knowledge; and
- Providing compensation and a working environment that reduces turnover.
Third, businesses can still rely on other legal protections, which are often included in non-compete agreements anyway. Even though the new rule would prohibit most non-compete agreements, non-solicitation agreements (which prevent former employees from stealing customers), and confidentiality agreements (which prohibit former employees from using your company’s trade secrets and confidential information) are not outlawed by the new rule.
Finally, the new rule has exceptions. For example, even if the rule takes effect, non-compete agreements will still be allowed for certain high-level executives and with the seller when a business is purchased.
For now, the best thing most small businesses can do is wait and see.
J. KEMP BRINSON | ATTORNEY