By G. Scott Walters, Kenny R. Cantrell, III, and Erica Maria Alvarado Gomez of Smith Currie & Hancock LLP
Originally published April 30, 2024
On April 23, 2024, the Federal Trade Commission (“FTC”) issued its final rule banning nationwide a large majority of non-compete agreements, with a few, limited exceptions (the “Rule”). The Rule not only renders future non-compete agreements unenforceable, but it invalidates existing non-compete agreements for many workers. The Rule will become effective 120 days after publication in the Federal Register—most likely in late August 2024. The Rule potentially affects employers significantly, including construction industry employers. Once the Rule is in effect, employers will need to consider other means of protecting their competitive business interests. The Rule can be found on the FTC’s website here on pages 561-568.
Generally speaking, states that permit the use of non-compete clauses as restrictive covenants only do so where there are reasonable limitations on duration and scope of the restriction as well as the geographical territory to which the restriction applies. Still, the use of non-compete clauses in employment contracts and policies can be an effective tool in dissuading such key employees from attempting to use those skills to the competitive detriment of the employer who fostered them. If the Rule stands, companies could have an easier time poaching key employees from competitors.
The Rule provides that it is an unfair method of competition—and therefore a violation of section 5 of the FTC Act—for employers to enter into non-compete clauses with workers on or after the Rule’s effective date. The Rule provides that it will it be a violation of the FTC Act for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause after the effective date. Additionally, non-compete agreements entered into before the effective date, are no longer enforceable as of that effective date. There is an exception for senior executives who have non-competes in place prior to the Rule’s effective date. The Rule defines a “senior executive” as a business entity’s president, chief executive officer (or equivalent), or any other officer or person having policy-making authority for the business entity a worker in a policy-making position with the employer, so long as that officer or person receives compensation equal to or greater than the threshold amount stated in the Rule.
A contractual term or work place policy, whether written or oral is a “non-compete clause” banned by the Rule when it prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of employment; or (2) operating a business in the United States after the conclusion of the employment. A “worker” is defined by the Rule to be “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”
Employers must also provide workers with existing non-compete agreements, no later than the effective date of the Rule, with clear and conspicuous notice that existing non-compete clauses are no longer enforceable. The notice should identify the parties to the agreement, be on paper delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker. If an employer that is required to provide notice has no record of a street address, email address, or mobile telephone number, they are exempt from the notice requirement. The Rule contains model language for this notice that complies with the notice requirement that should be utilized to assure compliance. The model notice can be found on FTC’s website here on pages 565-566.
The Rule includes numerous exceptions and limitations. For example, the Rule exempts from the ban non-competes which are executed as part of the sale of a business. Specifically, the Rule exempts non-competes entered into by a person pursuant to a “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets” without regard to such person’s percentage ownership interest in said business entity or assets. Additionally, the Rule provides a good faith exception to violations relating to enforcement or attempts to enforce a non-compete and representations about a non-compete where an employer has a good-faith basis to believe that the worker is subject to an enforceable non-compete. Lastly, the Rule does not apply where a cause of action related to a non-compete accrued prior to the Rule’s effective date.
Businesses active in states limiting non-competes under state law should note that if a state law has narrower exceptions or more stringent requirements to non-compete provisions, these will survive implementation of the Rule; however, broader exceptions to the prohibitions in the Rule would be preempted by the Rule. The Rule does not limit or affect enforcement of state laws restricting non-competes where the state laws do not conflict with the Rule, but the Rule does preempt conflicting state laws.
Many businesses invest considerable sums in training and developing their workers to maximize their potential and to hone their skills. Often employees must guard businesses’ sensitive and proprietary information. Construction industry employers have been embracing the use of written employment agreements for key workers, including superintendents, project managers, and business development and accounting personnel. Many contractors, particularly those employing skilled trades, spend significant dollars cultivating and training employees to bring in business and to effectively administer, manage, and supervise their projects.
In support of such business interests, the U.S. Chamber of Commerce and other business organizations recently sued the FTC and its Secretary in federal court challenging the legality of the new rule and seeking to stay and enjoin enforcement of the Rule. Plaintiffs in this litigation argue that businesses have strong interests in preventing others from what they describe as free-riding on businesses’ investments or gaining improper access to competitive, confidential information. Businesses throughout the United States have relied on reasonable noncompete agreements to protect their interests for centuries and many businesses continue to rely on targeted noncompete agreements for these same reasons today.
Many courts and lawmakers have recognized that noncompete clauses in employment agreements may pose an unreasonable burden for some types of workers and may be inappropriately restrictive. Noncompete agreements have never been regulated at the federal level. There is, however, an established tapestry of state laws that determine when noncompete agreements are enforceable, and when they go too far.
The current climate in the federal judiciary, including the Supreme Court of the United States has been somewhat hostile to administrative rule making. Indeed, the Supreme Court and lower courts have invoked what is called the “major questions” doctrine liberally to strike down several administrative rules over the last couple of years. The major questions doctrine is a principle of statutory interpretation in United States administrative law preventing agencies from resolving issues of major economic or political significance without clear statutory authorization. This doctrine presumes that Congress does not delegate these issues to executive agencies.
Applying this major questions doctrine to FTC’s promulgation of the Rule, the FTC’s attempt to impose a nationwide ban on noncompete agreements may not withstand judicial scrutiny. Still, the outcome of the litigation remains uncertain. Therefore, a prudent employer, including those employers in the construction industry, would be wise to start taking steps to comply with the Rule if it goes into effect.
With the nationwide ban on non-compete clauses for covered workers set to take effect later in 2024 (barring court intervention), employers, including construction industry employers, need to consider alternative means or methods by which they can retain key employees and limit the risk to their business interests posed by those employees jumping ship to work for the competition. Such examples might include: i) adopting strict confidentiality policies and training concerning handling and use of trade secrets: ii) non-disclosure and non-solicitation agreements; iii) training repayment agreements; and iv) limiting access to confidential business information and technology. When considering such alternative measures, employers should consult with competent legal counsel.
G. Scott Walters is a Partner with Smith, Currie & Hancock LLP. He represents construction-industry clients in federal government construction contracting issues, claims and disputes, regulatory compliance, litigation and alternative dispute resolution, contract drafting and negotiations, and general business and corporate matters. He litigates and advises in construction disputes in state and federal courts, at boards of contract appeals, and in private arbitration. Walters serves on the NASBP Attorney Advisory Council. He can be reached at gswalters@smithcurrie.com or 404.582.8062
Kenny R. Cantrell, III is an Associate with Smith, Currie & Hancock LLP. He brings more than a dozen years of experience in a broad range of business and civil litigation matters. He represents owners, general contractors, subcontractors, architects, engineers, and suppliers in disputes and also advises them on a variety of issues. He can be reached at krcantrell@smithcurrie.com or 404.582.8066.
Erica Maria Alvarado Gomez is an Associate with Smith, Currie & Hancock LLP. She advises clients in a variety of construction matters to help them achieve business goals and resolve problems. She can be reached at emgomez@smithcurrie.com or 954.734.1805.