Navigating Non-Compete Agreements in Light of the FTC’s New Ruling

In the evolving landscape of employment law, non-compete agreements have long been a tool for businesses to protect their interests. Traditionally, North Carolina’s statutory provisions required non-compete agreements to be in writing and signed, enforceable only when deemed “reasonable as to time and territory.” However, with the Federal Trade Commission (FTC) issuing a new “Final Rule” on non-competes, significant changes have come into play.

Understanding Non-Compete Agreements

Non-compete agreements are contracts in which an employee agrees not to enter into competition with an employer after the employment period is over. These agreements often include restrictions on working within a specific geographic area or with the employer’s clients for a determined period. The primary goal is to protect the employer’s business interests, including trade secrets and customer relationships.

Historically, North Carolina courts have enforced these agreements if they were reasonable concerning time and territory. The “blue-pencil” rule allowed courts to modify overly broad agreements rather than invalidating them entirely. However, the FTC’s new rule significantly alters the enforceability and application of non-compete clauses.

The FTC’s Final Rule on Non-Compete Clauses

The FTC’s Final Rule, set to take effect on September 4, 2024, bans almost all non-compete clauses, labeling them an “unfair method of competition.” The Rule generally makes those already in place unenforceable after the effective date and eliminates their use in contractual agreements moving forward.

This major shift aims to promote competition and worker mobility. Here are the key aspects of the new rule:

• Existing Non-Competes: All existing non-compete clauses will become unenforceable after the effective date, except those involving Senior Executives (as defined by section 910.1) in “policy-making positions” earning more than $151,164 annually. Non-compete clauses for Senior Executives are still enforceable if entered into prior to the effective date.
• Notification Requirement: Employers must notify workers currently bound by non-competes that these clauses are unenforceable as of the effective date.

There are a few exceptions to which the Final Rule does not apply:

• Bona fide sales of business: A non-compete clause associated with the sale of a business entity or a significant portion of its operating assets.
• Existing causes of action: Situations where a legal right from the breach of a non-compete clause has become actionable before the effective date.

Timeline and Opposition to the Final Rule

The Final Rule is set to take effect on September 4, 2024 (“the effective date”). However, commentators have made several arguments in opposition to the Non-Compete Clause Rule, some of which are constitutional in nature. Constitutional challenges regarding retroactivity, due process, and impermissible takings under the Fifth Amendment could potentially delay the effective date of the Rule.

Frequently Asked Questions

What should employers do if they already have non-compete agreements in place?

Employers need to audit existing non-compete agreements and determine which workers are classified as “Senior Executives” to identify those exempt from the rule. If the Rule goes into effect, notices must be provided to other workers informing them that their non-compete clauses are no longer enforceable.

How can employers protect their business interests without non-compete agreements?

The Final Rule encourages the use of alternative methods, such as non-disclosure agreements (NDAs) and trade secrets law. Employers should also review and possibly revise other restrictive covenants, such as non-solicitation and confidentiality agreements, to ensure they are narrowly tailored and legally compliant.

Are there any exceptions to the rule?

Yes, the rule does not apply to non-competes entered into during the bona fide sale of a business or existing causes of action related to breaches occurring before the rule’s effective date.

What actions can businesses take before the rule’s effective date?

Since it will not be permissible to enter into a non-compete agreement after the effective date, businesses should consider executing non-competes with Senior Executives before the expected September 4, 2024 date. Businesses should also prepare to provide notice to any impacted employees. The FTC advises that an all-staff email notice will suffice.

Additionally, reviewing and updating confidentiality agreements and non-solicitation clauses to ensure they do not function as de facto non-competes is advisable.

Key Takeaways from Dozier Miller

As the FTC’s new rule reshapes the landscape of non-compete agreements, businesses face significant challenges in adapting to these changes. It’s crucial to explore alternative methods to protect your interests effectively. We understand this can be a daunting task, and we highly recommend seeking legal counsel to navigate these complexities and ensure compliance with the new regulations.

At Dozier Miller Law Group, we empathize with the concerns and uncertainties you might have during this transition. Our attorneys have years of experience defending the rights of businesses and employees in the Charlotte area. They are dedicated to providing tailored, comprehensive guidance and representation tailored to your specific needs. We are here to help you stay ahead in this evolving regulatory environment while safeguarding your business’s interests. Our team is committed to supporting you every step of the way and ensuring that your rights are protected. For more detailed information and personalized legal advice, please reach out to our office to consult with one of our experienced attorneys. We would be honored to assist you in navigating these changes and securing your business’s future.