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Regulation and Compliance > Federal Regulation

Could Non-Compete Agreements Be Finished?

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What You Need to Know

  • A proposed rule from the FTC would require employers to rescind almost all existing non-compete clauses and tell their employees that they are no longer subject to the restrictive covenant.
  • All fifty states currently restrict or curtail the use of non-competes use to some degree.
  • Employers should consider the use of narrowly tailored non-disclosure, confidentiality and other agreements to protect their legitimate business interests.

The Federal Trade Commission (FTC) is proposing a set of rules which, if passed and deemed constitutional, would severely limit the use of non-compete clauses between employers and their employees.

The proposed rule would, among other things, provide that it is an unfair method of competition for an employer to enter or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.

I sat down with my partner, Scott Unger, to address this issue.

Non-Compete Clause Basics

A non-compete clause is a contractual term between an employer and a worker that typically blocks the worker from working for a competing employer or starting a competing business within a certain geographical area and period after the worker’s employment ends.

Currently, there is no federal legislation governing the use and enforcement of restrictive covenants. Rather, their enforceability depends on the application of state law.

All 50 states currently restrict or curtail their use to some degree. Three states — California, North Dakota and Oklahoma — have adopted statutes rendering non-compete clauses void for nearly all workers.

Among the remaining 47 states where non-compete clauses may be enforced under certain circumstances, eleven states and the District of Columbia have enacted statutes making non-compete clauses void or unenforceable — or have banned employers from entering non-compete clauses — depending on the worker’s earnings or other similar factors.

In the states where restrictive covenants are legal, courts employ a reasonableness inquiry when determining whether the provision is enforceable.

Generally, courts first consider whether the restraint on the former employee is greater than needed to protect the employer’s legitimate interest.

If the employer can demonstrate a legitimate interest, then the employer must show that the non-compete clause is narrowly tailored to achieve that purpose. In doing so, courts consider whether the geographical and time scope provided for in the restrictive covenant is reasonable.

Some states, like Pennsylvania, require that the employer provide some form of consideration in exchange for the restrictive covenant.

The Broker Protocol

Current law in the states where restrictive covenants are enforceable requires a deeper analysis, weighing the employer’s right to protect its investment in their business and employees versus the employee’s right and need to support themselves. In other words, restrictive covenants are not enforced haphazardly or without these important considerations.

In addition, some industries have created option-in industry agreements, such as the financial industry’s Broker Protocol, which limits the applicability of non-competition agreements.

The Broker Protocol is a voluntary program where employers may opt into a series of rules which allow their employees to almost move from one firm freely to another firm, provided both the former and current employer are both members and the employee only takes their clients’ names, addresses, phone numbers, email addresses, and account title information.

The purpose is to minimize litigation between member firms.

An End to Non-Competes?

The FTC has sought public comment on several sweeping changes that, if enacted and deemed constitutional, would nearly eliminate the use and enforceability of restrictive covenants.

The proposed rule would broadly define the term “non-compete clause” as a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.

Further, the proposed rule would require employers to rescind almost all existing non-compete clauses no later than the rule’s compliance date and tell their employees that they are no longer subject to the restrictive covenant.

To facilitate compliance, the proposed rule would include model language to satisfy this notice provision and establish a safe harbor whereby employers inform their employees that they are no longer subject to the restrictive covenant.

The proposed rule includes a limited exception permitting the use of a restrictive covenant if it is included in the buyout of a member, partner or shareholder’s interest if they owned at least 25% ownership stake in the business entity.

Even if the FTC were to enact this legislation, it is unclear whether it could survive a constitutional test. The FTC’s purported power comes from Section 5 of the Federal Trade Commission Act. It is uncertain whether the federal courts would broadly interpret the FTC’s power to supersede state laws on the subject.

Assuming the legislation is adopted and is deemed to be constitutional, Unger advises that employers should consider the use of narrowly tailored non-disclosure, confidentiality and “garden leave” agreements to protect their legitimate business interests.


Thomas D. Giachetti is chairman of the Investment Management and Securities Practice of Stark & Stark. A former investment banker and NASD registered representative, Giachetti’s legal practice is devoted to investment-related matters, including the representation of investment advisers, financial planners, broker-dealers, CPA firms and registered reps.

(Image: ntinai/Adobe Stock)


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