Many employers try to protect their business territory and customer base by imposing restrictions on employees. Most popular among these are non-disclosure agreements (“Don’t use or share my trade secrets!”), non-solicitation of customer agreements (“Don’t steal my customers!”) and non-competition agreements (“Don’t even go into the same business as me!”). One of these, non-competition agreements, has been under fire from a Federal Trade Commission rule which would bar the enforceability of most of those agreements. The few that would remain valid are limited to high level executives making more than $150,000 per year, or those that are part of the sale of a business.
Many people, including the Biden administration, have long felt that employers overreach in restricting their employees’ ability to earn a living in their field of expertise after leaving the employer’s business. Indeed, North Carolina courts have long imposed limitations and restrictions on the enforceability of such agreements. They require the employer to prove the agreement’s reasonableness as to time and territory, among other restrictions. This has made enforcing these agreements both hard and unpredictable for many years. Still, the agreements remain a popular approach for many businessmen. The new FTC rule, if allowed to go into effect, would at least simplify things, but not in a way that employers will like.
Here are the basics: The Federal Trade Commission published the new rule which declares it to be an unfair trade practice to even include such restrictions in their employee contracts. The rule was set to take effect in early September unless “stayed” by a court. Several business organizations, including the U.S. Chamber of Commerce, sued over the rule, and at least one court has put it on hold until it resolves a lawsuit on its validity. On August 20, 2024, in Ryan, LLC v. FTC, a U.S. District Court held that the FTC’s non-compete rule is unlawful and ordering that the FTC’s non-compete rule could not take effect on September 4, 2024, or thereafter. This ruling prevents the FTC from enforcement of the rule against any company nationwide.
At least two other cases challenging the rule have also gone poorly for the FTC. For now, it appears that it will be a long time, if at all, before the rule can take effect. 1 Then again, it appears that the National Labor Relations Board may join the fray. On October 7, 2024, its General Counsel issued a memo opining that broad non-competes act chill the employees’ right to “concerted activity” and may violate the National Labor Relations Act. Stay tuned!
Regardless of the FTC rule status or the NLRB position, individual employees can always challenge the reasonableness of the restrictions imposed on them by virtue of their agreements, which can pose an expensive and risky threat to employers. The contracts in question are assessed on an individual basis, and where the employer can convince the court that the agreement is narrowly tailored to protect the employer’s legitimate interests, they should survive. This is not always easy, however.
Fortunately, other alternatives are available. Non-solicitation clauses, which only prohibit the “raiding” of the employer’s customers, are, as a practical matter, already more narrowly drawn that non-competition clauses. Further, it is easier for the employer to identify and prove to a court that the ex-employee is taking advantage of information obtained while employed— valuable as both a legal and psychological distinction when advocating for enforcement of a restriction. These clauses are, therefore, easier to enforce in North Carolina anyway, and if they can accomplish the employer’s goals, they are preferable to a blanket ban on competition. Likewise, North Carolina courts are much more open to enforcing non-disclosure agreements, if the information protected is truly proprietary “trade secret” type information.
Employers who feel the need to restrict employees’ ability to attack their business upon departure should definitely consult counsel to ensure that the strongest restrictions which are enforceable are put into place.
1 However, the FTC retains the ability to go after individual cases where the employer’s actions are deemed to be anti-competitive activity, and it may pursue enforcement actions on a case-by-case basis. The FTC considers non-compete agreements to be violations of Section 5 of the Federal Trade Commission Act (FTCA), which bans “unfair methods of competition” and “unfair or deceptive acts or practices.” The FTC has the power to review and enforce that law.
Peter Juran brings over 30 years of litigation experience, having tried cases to verdict before juries, judges, and arbitrators. He advises clients on employment law, construction disputes, intellectual property, real estate, corporate governance, and trust and estate matters. Certified as a mediator, Peter also conducts Superior Court Mediated Settlement Conferences. Known for his strategic approach, he helps clients navigate complex disputes, whether through negotiation or litigation, to achieve the best possible outcomes.