Changing Non-Compete Landscape: Protecting Your Livelihood in the Wake of Federal Ban
By: James E. Meadows
Updated August 21, 2024
A new rule from the U.S. Federal Trade Commission (“FTC”) prohibits for-profit businesses from enforcing most non-competition provisions in existing employment agreements (often called “non-competes”) and prohibits businesses from including any non-compete clauses in new employment agreements. Enforcement of the new rule nationwide was temporarily enjoined by a U.S. District Court on August 20, 2024. The FTC’s new rule, effective September 4, 2024, declares all existing non-competes immediately unenforceable other than those with senior executives in policy making positions who earn more than $151,164 a year.
Employers, if the injunction is lifted or expires, will after September 4th be required to tell all other workers that non-compete agreements will not be enforced. No new non-compete provisions can be entered into by companies and employees regardless of an employee’s job position or total income. The new FTC rule effectively bans the use of non-compete agreements by anyone other than not-for-profit entities, like religious groups and charities, because they are outside of the FTC’s regulatory power.
The FTC’s new rule is the fulfilment of a 2020 campaign pledge by now-President Joe Biden. Pushed by workers’ rights organizations, unions, academics and progressive think-tanks, proponents of the new rule argue non-competes do not protect legitimate business interests but instead reduce labor mobility and suppress wages nationwide. The University of California- Davis Law Review noted in its June 2024 edition that the banning of non-competes led to a 2-3% increase in hourly wages without any increase in hours worked in states that had previously adopted similar prohibitions. In announcing the finalized rule, the FTC claims new small business formations will increase by almost 3% a year, workers’ earnings will rise around $524 per year on average, and approximately one in five American workers will be freed from non-competes due to prohibiting such clauses non-competes nationwide.
Multiple business groups, including the U.S. Chamber of Commerce, have challenged the FTC authority to issue the new rule in court. Multiple cases disputing the FTC right to issue the ban have been filed in federal courts around the country. On July 3, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas, ruled that the FTC could not enforce its non-compete rule, but the case only pertained to the parties in that specific case. On August 20, 2024 Judge Brown made her order apply nationwide. To date, no federal court outside of the Northern District of Texas has ruled on this issue.
Non-compete agreements have been a popular tool for employers in Missouri and other states looking to restrict competition from former or soon-to-be-former employees. These restrictions are designed to protect employers from “unfair competition,” typically for a specific length of time and within a defined area. For example, a non-compete might ban a salesman from working within ninety miles of the city where she is currently employed for one year after leaving her current employer. Non-competes are present in a variety of fields including accounting, sales, engineering and health care.
Not all such provisions could be enforced even before the effective date of the FTC’s new rule. Missouri courts will enforce non-compete agreements only “so long as they are reasonable” Missouri courts will enforce non-compete agreements. Payroll Advance, Inc. v. Yates, 270 S.W.3rd 428, 435 (Mo App. S.D. 2008). A non-compete is “reasonable” if it is “narrowly tailored” in terms of its geographic reach and length of duration. Id. Non-compete provisions cannot be used, even under current Missouri law, in every employment context.
Enforceable non-compete agreements in Missouri must protect a specific interest of an employer. Examples of protectable interests include keeping trade secrets and pricing confidential as well as preserving customer contracts developed by employer or the former employee while being paid by the employer. Trade secrets must be something unique to the employer itself, different from the rest of the industry. Customer contacts are more than simply knowledge of the type of consumer interested in a particular good or service and would include specific names and contact information. Prohibiting competition from a former worker is not, standing alone, recognized as a legitimate interest.
Difficulties beyond FTC regulations exist if a business wants to enforce a non-compete. Some states do not allow, or severely restrict, non-competes. Provisions restricting post-employment competition are not allowed at all in California, Montana, North Dakota and Oklahoma. In Maine, Maryland and Washington, only employees paid above a certain amount are bound by non-compete agreements. Additionally, courts also impose stringent requirements on attempts to enforce non-compete clauses that, although not an outright ban of their use, effectively limit enforcement of non-compete provisions to rare circumstances.
When a business tries to enforce a non-compete, it must first file a lawsuit in state or federal court to obtain a temporary restraining order, temporary injunction and permanent injunction to enforce any non-compete. The employer must convince a judge a sufficient protected interest exists, and that the prohibition is reasonable in duration and geographic scope. Judges can be reticent to ban an individual from working in a particular industry, particularly when the person has specialized experience or training. In order to overcome judicial reluctance, an employer often needs solid, specific evidence and will have to post a cash bond, typically of at least $1,000 to cover any damages its former employee suffers.
Even when a restraining order or injunction is obtained from a court, difficult still exist for employers to recover compensation from the former employee for the harm that individual has caused. Non-compete agreements can work better with a defined mechanism of enforcement. For example, a provision can provide for a specific fixed sum of damages or a set calculation for determining damages if there is a violation of the non-compete. Defined damages make it both easier for the Court to enforce a clause and better discourage an ex-employee from violating the agreement in the first place knowing the (presumably large) amount the employee might have to pay.
Employers still have options even if new FTC’s rule goes into effect in the future. Other types of restrictive provisions can be inserted into employment contracts and may effectively protect an employer’s interests. An employer can prohibit a former employee from contacting and trying to hire individuals at the employee’s former company using an “anti-raiding” provision. Trade secrets can protected be through non-disclosure agreements and ex-employees can be restricted from contacting specific customers of a former employer via an “non-solicitation” covenant.
We at Carnahan Evan, PC are here to guide you through this transition impacting non-competes and employee-employer relationships. Reevaluating post-employment clauses in employee handbooks, contracts and policies will help you know your options. We encourage you to contact your attorney at Carnahan Evans, PC for additional guidance.
###
James E. Meadows is an attorney and shareholder with the law firm of Carnahan Evans PC. Mr. Meadows focuses his practice on contract disputes, real estate claims, construction payment and defect claims, insurance coverage actions, and employment cases. He can be reached at jmeadows@carnahanevans.com.
