The Federal Trade Commission (FTC) has been in the news recently concerning banning non-compete agreements in their final rule published 07 May 2024.The FTC final rule addresses noncompete clauses specifically between employers and employees that they deemed as overly restrictive. In the final rule, the FTC determined that noncompetes are “an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes”.

Section 5 of the FTC Act specifically prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.”

In a statement from FTC Chair Lina M. Khan concerning the enforcement of these clauses, she stated, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.” According to FTC empirical studies, they estimate that banning non-compete agreements will result in the following improvements.

  • 7-3.2% increase in new business formations (~8,500 new businesses) annually.
  • Help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year.
  • Increase in worker earnings of $400M+ over ten years.
  • Increase in new patents of 30-50K over ten years.
  • Decrease in healthcare/clinical services cost of $74-194 billion over ten-years.

Below are the key changes identified in the final rule:

Non-Compete:

  • Non-Compete Agreement: The noncompete agreement prohibits employees from competing with the employer, whether by creating a new competitive company using skills gained from employment or working for a competitor.

FTC believed that the current noncompete agreement were exploitative and seeks to limit these restrictions to “ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” according to FTC Chair Lina Khan.

The new rule, effective 04 September 2024, even existing noncompetes will no longer be enforceable and employers will be required to inform employees that the company will not be enforcing those agreements against them.

One exception to the noncompete enforceability applies to agreements with senior executives, which will remain in force. FTC defines senior executive as someone that is “earning more than $151,164 who are in a “policy-making position.”

Similar Agreements:

Though the FTC is effectively prohibiting noncompetes, they do not specifically restrict other agreements employers may use to protect themselves and their trade secrets. However, they do include this caveat in the comments “the definition of non-compete clause also applies to terms and conditions that restrain such a large scope of activity that they function to prevent a worker from seeking or accepting other work or starting a new business after their employment ends.”

  • Non-Disclosure Agreements: A non-disclosure agreement will prevent your former employees from disclosing your company’s trade secrets and other business information to competitors. In addition, employees who sign a non-disclosure agreement will not be able to share information with third parties, since this can affect a company’s reputation. Another variation is a Mutual non-disclosure agreement (MNDA) which are legal documents that establish a confidential relationship between two or more parties. The purpose of a mutual NDA is to protect sensitive information that may be shared between the parties during the course of their business dealings.
  • Confidentiality Agreements: When hiring new employees, certain employers may request the signing of a confidentiality agreement. It’s important to note that a confidentiality agreement differs from a noncompete agreement. A confidentiality agreement requires employees to keep all business-related information confidential both during and after their employment. This agreement holds employees accountable for any disclosure of information to competitors or third parties without prior approval. Generally, an employer is also liable if any information regarding their employees are disclosed.
  • Non-Solicitation Agreements: A non-solicitation agreement prohibits former employees from reaching out to or conducting business with the employer’s former clients and customers. It also serves to prohibit ex-employees from recruiting current staff members. Further, it prohibits competitors or partners from soliciting or poaching a company’s employees.

When Will FTC’s Non-Compete Agreement Ban Take Effect?

The FTC’s Final Rule bans all future and existing non-competes will take effect 04 September 2024. However, this new ruling faces many legal challenges which could delay the implementation of the new rule.

How Can Contractors Prepare for the FTC Non-Compete Ban?

Although the ruling from the FTC will likely face legal challenges, contractors should review and evaluate all existing teaming agreements, and contracts with employees and subcontractors to identify any non-compete clauses and determine which contracts are affected by the upcoming rule change. For contracts that currently include non-compete clauses, contractors should consider revising the language to remove any non-compete restrictions that may be prohibited under the new regulations.

Finally, stay informed about any developments or clarifications regarding the FTC rule. Keep abreast of changes in legislation or enforcement that may impact your compliance efforts.

Coley has over 20 years’ experience helping thousands of companies accelerate and sustain contracting success. If your team needs help in managing your government contracts, we are here to help! Contact us today at hello@coleygsa.com or 210-402-6766 or book some time convenient for you to get started.

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