The Federal Trade Commission (FTC) just announced, at the time of this writing, its ban on most noncompetition agreements between employers and workers utilized by businesses throughout the U.S. The new FTC Rule, originally proposed in 2023, is set to become effective 120 days after its publication in the Federal Register, which will depend on the outcome of legal challenges opposing the ban[1]. The Rule embodies policy goals of the current U.S. President’s administration and mandates how businesses compete.
However, companies utilizing non-compete clauses or agreements advocate that these tools are an effective means to protect trade secrets, intellectual property, and other related confidential information. Typically, in the automotive industry context, a non-compete agreement might be used with dealership personnel, such as sales or F&I staff, to protect proprietary customer and sales related information and processes. Also, in the context of a dealership buy-sell, non-compete clauses or agreements are utilized to protect the investment of the purchasing dealer.
In the face of the pending legal challenges to the Rule, some businesses are assuming a wait-and-see posture while they monitor the legal cases and continue their use of non-compete agreements. Other businesses are also evaluating how they might protect their proprietary interests without non-compete agreements or clauses and are preparing for inevitable effective date and enforceability once the legal wrangling ceases.
It's important for businesses to understand the ban now in the event it goes into effect in the near term. First, as mentioned above, the Rule becomes effective 120 days after publication in the Federal Register which may be delayed depending on the pending lawsuits.
The Rule prohibits new non-compete clauses and agreements with all workers, which includes senior executives and also includes independent contractors, volunteers, interns, and all persons who work for an employer or contractor. After the effective date of the Rule, such a non-compete clause or agreement will be viewed by the FTC as an “unfair method of competition” and prohibited by the Federal Trade Commission Act, thereby subjecting businesses to possible enforcement actions, civil claims and penalties.
For non-compete covenants or agreements existing as of the effective date, only those with senior executives (earning greater than $151,164.00 and working in “policy making positions”) will be grandfathered or permitted to continue. There is also a business sale exemption in the Rule for noncompete agreements that are entered into as part of a bona fide sale of a business.
Business consultants, attorneys and other advisors expect additional legal challenges against the Rule to be lodged, so it is difficult to state with certainty when the Rule will become effective. However, businesses are urged to evaluate how they will protect company interests in lieu of using non-compete clauses or agreements.
Businesses should not wait or necessarily rely on the pending legal challenges to undertake their own due diligence to ensure the lawfulness of their agreements and covenants in place and to protect the proprietary nature of confidential information, trade secrets and intellectual property.[2] Companies should review any existing agreements that contain restrictive clauses or provisions and plan for the effective date of the Rule. This might include determining how to protect proprietary information and preparing to comply by changing existing agreements or clauses, and by notifying workers who are subject to noncompetition agreements that will be unlawful once the Rule becomes effective.
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[1] Within 24 hours of the FTC’s adoption of its ban on Apr. 23, 2024, the U.S. Chamber of Commerce and other pro-business groups filed suits in federal court asserting the FTC lacks authority to issue and enforce its blanket noncompete ban as an “unfair method of competition”, citing the absence of a clear mandate from the U.S. Congress. Enforcement of the rule could be delayed well beyond the 120 days, particularly if the cases are appealed down the road. (See Chamber of Commerce et al. v. FTC et al., No. 6:24-cv-148; see also Ryan, LLC v. FTC, No. 3:24-cv-986).
[2] Certain federal agencies operating under a different set of federal laws have been recently challenging nondisclosure, non-solicitation and confidentiality covenants and agreements as unlawful, separate and apart from the FTC and the new Rule.
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Julie A. Cardosi is Principal of the private firm, Law Office of Julie A. Cardosi, P.C., of Springfield, Illinois. She has practiced law for 38 years and represents the business interests of franchised motor vehicle dealers throughout Illinois. Formerly in-house legal counsel for the Illinois Automobile Dealers Association, she concentrates her private practice in the areas of dealership operations and compliance matters, transfers of ownership, mergers and acquisitions, franchise law, commercial real estate transfers, dealership employment and other areas impacting day-to-day dealership operations. She has also served as former Illinois Assistant Attorney General and Deputy Chief of the Consumer Fraud Bureau of the Attorney General’s Office. The material discussed in this article is for general information only and is not intended as legal advice and should not be acted upon as such. Dealers should consult their own private legal counsel for application to their specific circumstances. For more information, Julie can be reached at jcardosi@autocounsel.com, or at 217-787-9782, ext. 1.
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