The United States Federal Trade Commission (FTC) rocked the business world recently with the pronouncement that noncompetes would be banned. The apparent nullification overnight of approximately 30 million business contracts in the United States hit like a lightning bolt. Is this the end for noncompetes?

As an original co-author of the ABA/BNA treatise “Covenants Not to Compete: A State by State Survey” and a current co-editor, I received many inquiries this past week concerning the FTC proclamation. I am here to report that we are a long way from the end of noncompetes at this point. Here is what you need to know.

First, the FTC rules will not be effective until 120 days after they are published in the Federal Register. The U.S. Chamber of Commerce and other entities have already filed federal court lawsuits seeking an emergency injunction against the regulations. There is reason to believe that these efforts will be successful and the FTC rules will be enjoined before the 120 day period expires. Those entities opposing the FTC regulations will no doubt invoke the “major questions doctrine” and assert that the FTC lacks the specific legislative mandate to impose such a dramatic change in the law. It will likely be pointed out that within the last year the U.S. Environmental Protection Agency (EPA) attempted to impose dramatic new regulations, and the U.S. Supreme Court ruled 9-0 that it could do no such thing. The FTC regulations may well meet the same fate, even though the FTC claims that their enforcement authority stands as “crystal clear.” We shall see.

My second point focuses on what should be done in the meantime. Stop using noncompetes? No. To the extent employers believe noncompetes constitute a valuable business practice designed to protect company trade secrets and confidential information as well as the valuable goodwill that exists between employers and their customers, noncompetes remain legal and enforceable, subject to the various state laws limiting them.

Point three: take advantage of the now-available proposed FTC regulations to position your business for all possible outcomes to the greatest extent possible. Note that exceptions from the ban exist: highly compensated individuals who are in a policy making position and earn at least $151,164 per year; sale of business noncompetes; as well as existing noncompete litigation.  

My fourth and final point involves looking to the future in all directions. In particular, will customer non-solicitation provisions be determined to be unenforceable noncompetes or exempted? The current regulations seem murky on this point. The National Labor Relations Board (NLRB) already stated its opposition to any provision that has the effect of a noncompete, suggesting that they will challenge even mere non-solicitation provisions as illegal under the National Labor Relations Act. The FTC plays it much closer to the vest in terms of the current regulations. It identifies a noncompete as:

“a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business United States after the conclusion of the employment that includes the term or condition.”

How will this be interpreted? Will non-solicitation of customers constitute a noncompete under this definition or will it be excluded it? It seems plausible that either interpretation may end up prevailing. Thus, the wise employer will draft noncompete agreements with separate non-solicitation provisions so that these might be salvaged in the event of a cataclysmic non-compete ban actually ending up being deemed enforceable by the U.S. Supreme Court.

For now, wise employers will not overreact, but will take steps to maintain the full panoply of options with respect to protecting their valuable intangible workplace property. This may include signing “bonus” loans or “training” fee obligations (both hated by the NLRB), as a means of controlling employees, among other creative solutions to a serious situation.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.