FTC ban on non-compete agreements expected to be delayed

A federal ban on non-compete agreements is slated to take effect on Sept. 4, but it’s likely to be delayed, so employers don’t need to rush to take any action, legal experts say.

The new Federal Trade Commission rule has already triggered litigation challenging the agency’s authority to impose the ban, and there’s a good chance an injunction could be issued before the effective date, according to attorneys Peter J. Glennon, and Ben Mudrick.

Glennon and Mudrick on Thursday took part in an online presentation about the new FTC ban on non-compete agreements.

The online panel discussion was sponsored by the Glennon Law firm PC and Harter Secrest & Emery LLP.

Lawsuits challenging the regulation have already been filed in Texas and in Pennsylvania.

“My gut is that, at a minimum, the court in Texas is probably going to put the rule on hold,” Mudrick said.

They expect an injunction will be imposed by July.

“Even though the rule is scheduled to take effect on Sept. 4 I don’t believe any immediate action is required,” he said.

Non-compete agreements have been a political issue for many years, especially during election cycles, Glennon said.

He noted that President Joe Biden talked about banning “non-competes” during his election campaign.

“And now it comes up months before the next election,” Glennon said.

“One of the reasons there’s so much political pressure against non-competes is this idea that, with a non-compete, you can’t get another job,” Mudrick said.

“There is pressure against non-competes in basically every state right now. When Biden was running for office, and when he was elected, he said publicly he wants to end non-competes and he was going to direct the FTC to look into that,” Mudrick said.

Forty-eight states, including New York, and the District of Columbia allow non-compete agreements today. Only Oklahoma and North Dakota have a complete ban on non-compete agreements.

They are banned in California, but employers have a choice of law provisions, so they can use New York state’s law, which allows non-compete agreements.

Legislation banning non-compete agreements in New York was sent to Gov. Kathy Hochul earlier this year, but she vetoed it.

And there is currently an initiative under way to attempt to ban non-compete agreements in New York City.

Whether or not a con-compete agreement is valid and enforceable usually requires a fact-specific analysis, even between two employees at the same company, Glennon said.

“A non-compete agreement is a contract where one party agrees not to compete or work for a competitor in exchange for a benefit. That benefit is usually an investment of training, resources, opportunity,” he said.

Typically, non-compete agreements involve an employer and employee, but they can also involve independent contractors, and be used in the sale of a business.

No employee is allowed to compete with their employer while working for that employer. No non-compete agreement is needed for that, Glennon said.

“Without non-compete agreements, once they resign their employment position, former employees are free to compete with, or work for, the competitor of a former employer,” he said.

Enforcement of non-compete agreements is more common with higher-level employees because they tend to have more access to sensitive information, such as marketing ideas, plans to take over a new geographic area, or rolling out a new product, Glennon said.

Although New York state does not have an outright ban, there is a policy against non-compete agreements. They are generally not enforceable in New York if a company terminates an employee without cause.

In New York, to enforce a non-compete agreement you must initially prove you have a legitimate business interest to protect. You also have to prove that the time duration and geographic scope of the agreement are reasonable.

“Courts may invalidate the non-compete if it’s overly broad or lacks legitimate business interests,” Glennon said.

The new FTC rule is broad and seeks to ban nearly all non-compete agreements, but the FTC does not have authority over all industries and employers.

Glennon, who typically represents employees, said employers should be penalized for misusing, or abusing non-compete agreements because employers often try to enforce invalid non-compete agreements against an employee “just trying to bankrupt that person or cause them to incur legal fees.”

In April the FTC voted to issue the rule to ban most employers from entering into new non-competes with workers other than senior executives.

“Essentially the rule is saying ‘no new non-competes, no enforcing current non-competes, except for a very very small group of people,” Mudrick said.

The exception for senior executives is only for non-compete agreements currently in effect.

The FTC claims the rule will lead to more innovation and patents, more new companies, and an average annual pay increase of $524.

“The FTC defines a non-compete as any term of employment that prohibits, penalizes, or functions to prevent a worker from seeking or accepting work with a different person after the conclusion of their employment,” Mudrick said.

“Under this rule, once it takes effect, you’re going to have to give a written notice to all of your employees who have non-competes and tell them it’s no longer enforceable. That’s going to be interesting,” he said.

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