The use of non-compete clauses, or even entire agreements, are an integral part of the American employment landscape, especially at the C-Suite level, but often in middle management and sales positions as well.
Our firm has a large and diverse client base, all focused in the construction materials industry, and the use of non-compete clauses or agreements are all over the map. While they are almost non-existent in some of our smaller clients’ businesses, they can be extensive at larger firms, often with varying terms between the employer and employee depending on the position.
Non-compete clauses have commonly been included in employment contracts of executives, salespeople, scientists and others with access to confidential or proprietary information, and employers impose non-compete clauses to 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 businesses. The clauses usually apply for a finite period of time and to a geographic area.
Just to review. In April of this year, the Federal Trade Commission issued a final rule to promote competition by banning non-competes nationwide, under the notion they were protecting the fundamental freedom of workers to change jobs, thus increasing innovation and fostering new business formation.
The FTC estimates that the final rule banning non-competes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses being created annually. An estimated 30 million workers, or nearly one in five people in the workforce, are subject to a non-compete.
Under the FTC’s new rule, existing non-competes for the vast majority of workers will no longer be enforceable after the rule’s effective date in September. Existing non-competes for senior executives, who represent less than 0.75% of workers, can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new non-competes, even if they involve senior executives.
In a draconian requirement within the new regulation, employers must provide notice to workers other than senior executives who are bound by an existing non-compete that they will not be enforcing any non-competes against them.
“Not so fast, Louie.” So goes the famous words of Humphrey Bogart in the movie classic Casablanca. As has been reported in the popular business press, employers face a summer of uncertainty about the legality of non-compete agreements ahead of the effective date in September.
Earlier this summer, a federal judge backed a challenge to a nationwide ban on the pacts; the ruling came days after the Supreme Court gave judges more latitude to challenge the rule-making authority of federal agencies. The judge in that case said the plaintiffs in a lawsuit challenging the ban are likely to prevail in a final ruling based on their argument that the FTC lacks statutory authority to promulgate the ban.
But the injunction applies only to the plaintiffs in the case, a tax-services firm based in Dallas, along with the U.S. Chamber of Commerce and a few other business groups, and it is likely to have little effect on them. The judge said the court would issue a final decision on the merits of their lawsuit by Aug. 30, a few days before the rule’s Sept. 4 deadline.
Another complicating factor: a judge in Pennsylvania will rule by July 23 on a request for an injunction in a separate lawsuit, brought by a tree-trimming business in Pennsylvania. That decision, along with the final rulings in both cases, could set the stage for a legal knot that might take years to resolve, employment lawyers say, as there could be a conflicting decision by these two trial courts. If that happens, it is very likely to head to the Supreme Court if the split decisions endure after appeals are exhausted. Employers are now left waiting for definitive guidance.
Aggregates producers should ensure that their HR personnel are following these developments as they unfold, which may take years to finalize.