7.5.23 – Washington Business Journal
In January, the FTC proposed a new rule that would ban employers from imposing any noncompete agreements in an attempt to expand career opportunities for all employees
Noncompete agreements between an employer and its employees typically bar an employee from working for a competitor, or starting a competing business within a certain geographic area and/or period of time after termination of the relationship. As they limit competition, the agreements have always been viewed critically as a restraint of trade. They also have incurred scrutiny because they limit an employee’s freedom.
The courts have historically created a balance of interests test to ensure the restraint is narrowly tailored to protect an employer’s business interest while allowing the employee the ability to find another job. As such, enforcement has been subject to various fact-intensive inquiries, leaving ambiguity but for those restrictions deemed too long (over five years), too broad (outside a certain radius of the job site) or too restrictive (meaning beyond the employee’s job functions).
In January, the Federal Trade Commission (FTC) proposed a new rule that would ban employers from imposing any noncompete agreements in an attempt to expand career opportunities for all employees.
Understanding the proposal
The FTC’s proposed rule change generally would prohibit employers from using noncompete clauses. Specifically, it would make it illegal for an employer to:
- Enter into or attempt to enter into a noncompete with a worker.
- Maintain a noncompete with a worker.
- Represent to a worker that under certain circumstances, the worker is subject to a noncompete.
The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect, according to the FTC.
The change would generally not apply to other types of employment restrictions, like nondisclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes.
“Even if noncompetes are allowed to stand, what comes with that is the court action necessary for enforcement,” said Gene Policastri, shareholder with Bethesda, Maryland-based law firm Selzer Gurvitch. “To enforce an agreement, an employer generally must sue both the employee who left and the company they are now working for, and assemble evidence and witnesses. The employer will want emergency (temporary) relief in the form of a preliminary injunction.” That costs money and takes the employer’s focus away from critical business functions. Meanwhile, getting to a trial could take 18 months, by which time the noncompete may have expired, subject to certain contractual extensions built into the noncompete.
“Companies that use noncompetes to help protect trade secrets, confidential information and client lists, and reduce employee turnover, should be watching proposed changes closely,” said Policastri.
“Many companies have a legitimate need to have a noncompete agreement so that when they make a significant investment to train their workforce, those employees don’t immediately take that training and go to work for the competition,” he said. “These agreements also protect against the customer base being vulnerable. Otherwise, customers could leave with the employee for the competition, which might not be financially sound enough to meet the customer’s needs — thus causing an unnecessary disruption in the marketplace.”
Only a few states currently ban noncompete agreements. The District of Columbia has a ban on noncompete agreements that has many exceptions, and about one in five American workers — about 30 million people — are bound by noncompete restrictions, the FTC reports.
The agency’s public comment period on the proposed rule ended April 19. “Regardless of its decision and the potential litigation against the ban that could follow if one is put into place, businesses should be aware that other options are available,” Policastri said.
“The uncertainty around this issue illustrates why it’s so important to have a continuous relationship with a knowledgeable lawyer who knows and understands your business,” Policastri said. For example, there are better alternatives to a standard noncompete which are more readily enforceable.
Noncompete alternatives
At Selzer Gurvitch, Policastri works with many clients to help them avoid costly “out of control” litigation down the road. His clients include C-suite executives, entrepreneurs, design professionals, business and life coaches, real estate professionals and consultants. Some solutions he advises businesses to use include nondisclosure agreements, nonsolicitation agreements, restrictive covenants and long-term contracts with key customers and clients.
Nondisclosure agreements. A nondisclosure agreement is a legally binding contract that establishes a confidential relationship. It can be used for businesses entering into negotiations with other businesses. Employees also can be required to sign these agreements to protect an employer’s confidential business information.
Nonsolicitation agreements. According to the American Bar Association, this provision prohibits a former employee from soliciting its former employer’s current, prior or prospective customers for a specified period of time. An “anti-raiding” provision prohibits a former employee from soliciting the former employer’s employees to work at a competing business.
Restrictive covenant tightly related to business interests. According to Policastri, this is an agreement between an employer and an employee that allows the employee to leave the company to work in the same industry but not share information with the new employer about proprietary processes and systems the former employer uses that give it a competitive advantage in the market.
Long-term contracts. Policastri recommends businesses negotiate long-term contracts with their most important customers to prevent them from jumping ship to follow employees who leave for a competitor.
“These protections help eliminate a sense of fear that stems from a constant worry that employees are threatening to leave,” Policastri said. “These solutions give the employer the incentive to invest in employees to help them to grow and expand the business. This allows the management team to focus on building a world-class workforce that is an asset to the business. This contributes to long-term growth and a sustainable profit. From that growth and profitability, the employer can then pay competitive salaries.”
The bottom line is that while noncompetes may become unenforceable or continue to be difficult and costly to enforce, carefully drafted nondisclosure and nonsolicitation agreements, restrictive covenants and the like can be used effectively to accomplish the same results.
It is always a good idea to have counsel review your employment agreements, especially with a potential change in the law. To schedule a document review, and to learn how Selzer Gurvitch helps its clients implement solutions to maximize business operations and avoid costly litigation, contact Gene Policastri.
Selzer Gurvitch Rabin Wertheimer & Polott, P.C. is a Bethesda, Maryland law firm focusing its practice primarily on transactional real estate, tax, land use and zoning, business, estate planning and general litigation. For more than 40 years, the firm has served clients throughout the Washington, D.C. metropolitan area. Visit us at selzergurvitch.com.
Laura Newpoff is a freelance writer with The Business Journals Content Studio.