Employee Survival Guide® - Breaking the Chains: The FTC’s Ban on Non-Compete Agreements

Episode Date: May 1, 2024

Prepare to be liberated from the shackles of non-compete agreements! This episode peels back the layers of the Federal Trade Commission's revolutionary ban that's set to empower approximately 30 million workers by September 4, 2024. We're not just talking about the end of these restrictive agreements—get ready to explore the strategic legal chess game that's unfolding as the U.S. Chamber of Commerce gears up for a significant challenge. With high-stakes implications for labor mobility and innovation, we dissect the rule's nuances, its special provisions for top executives, and concrete steps for employers to stay compliant.Shift the balance of power back into your hands as we unravel the ineffectiveness of non-competes for most employees and the bolstered protection non-disclosure agreements and trade secret laws provide without overextending. You'll gain insights into the FTC's anticipatory moves to secure favorable legal grounds and the anticipated decrease in litigation for workers wishing to advance their careers unimpeded. This episode isn't just a discussion; it's a clarion call for employees to navigate the new employment landscape with confidence. If you enjoyed this episode of the Employee Survival Guide please like us on Facebook, Twitter and LinkedIn. We would really appreciate if you could leave a review of this podcast on your favorite podcast player such as Apple Podcasts. Leaving a review will inform other listeners you found the content on this podcast is important in the area of employment law in the United States. For more information, please contact our employment attorneys at Carey & Associates, P.C. at 203-255-4150, www.capclaw.com.

Hey, it's Mark here and welcome to the next edition of the Employee Survival Guide where I tell you, as always, what your employer does definitely not want you to know about and a lot more. It's Mark and welcome back. Today we're talking about a very important topic. The Federal Trade Commission banned non-compete agreements nationwide for 30 million employees and executives, and a hotly disputed legal dispute is to follow. On April 23rd, 2024, the Federal Trade Commission approved a ban on non-competition agreements

nationwide that has been well anticipated and now hotly contested. On May 7, 2024, the final rule banning non-compete agreements will be published in the Federal Register and become effective on September 4, 2024. So mark your calendars. That's the date your non-compete expires unless you were sued, if not enjoined by a federal court in Texas. The ban will eliminate non-competition agreements for nearly 30 million employees, as I said, and will only be enforced for executives earning more than $151,000 who have a policy-making

position such as a CEO. You can read the complete supplementary information published in the Federal Register, which as I have looked it up, it's 547 pages long. It tells you everything you want to know and a lot more. It talks about all the various comments and the criticisms, and I can put it in the show notes. In essence, the rule provides, quote, for workers who are not senior executives, existing non-competes are no longer enforceable after the final rule's effective date, that's

September 4th, 2024. Employers must provide such workers existing non-compete notices that they are no longer enforceable. To facilitate compliance and minimize burden, the final rule includes model language for the employer that satisfies the notice requirement. The final rule provides that, with respect to a worker other than a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause, to enforce or attempt to enforce a non-compete clause, or to represent

that the worker is subject to a non-compete clause." The rule defines non-compete clauses to mean a term or condition of employment that prohibits a worker from or penalizing a worker for or functions to prevent the worker from, number one, seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term of condition. And they use the term of condition referring to the non-compete agreement. So, number two, operating a business in the United States after the conclusion of the employment that includes the term of condition, again, the non-compete provision.

The final rule further provides that for purpose of the final rule, term or condition of employment includes but not limited to a contractual term or workplace policy, whether written or oral. I don't write these rules, the agency does. It can be more clear about this. It's a non-compete. The rule defines an executive with a policy-making authority, which is a very important phrase they've used, and it defined it as, quote, final authority to make policy decisions that

control significant aspects of a business entity, end quote, and identifies executive titles such as the president and CEO or the equivalent. This definition, in my opinion, is unambiguous and narrows the types of executives still bound by non-compete agreements. The rationale for the exception is simple. High-level executives, such as presidents and CEOs, are exposed to essential trade secrets and business planning information during their employment and are extremely dangerous to the company if permitted to seek employment with a competitor.

That sounds rational, reasonable, courts agree as well, and those agreements usually are enforced. And most executives don't find themselves challenged by their employers in those contexts, if you're a CEO or president. There are two important and big exceptions to the rule. The rule does not prohibit non-competite agreements entered into by a person pursuant to a bona fide sale of a business entity.

Some states like Connecticut have that same rule. The most important exception that is time limited is that the rule does not apply to currently pending and future lawsuits filed against employees and executives prior to September 4th, 2024, the effective date of the rule. Maybe there will be a rush by employers to file injunctive relief actions lawsuits prior to the deadline, who knows? This now means 30 million employees are free agents and can switch employment to work for competitors

at their leisure. The rule does not eliminate employee non-disclosure agreements, NDAs, and trade secret laws, which remain the tools employers use to safeguard against disclosure of confidential information. They were always there, present, but the employers sought to say that they needed some more protection and that's why the emergence or the use of non-competes. In reality, folks, the use of the non-compete agreement was a capitalistic, economic grab, unfair competition against another competitor had nothing to do with the employee at all. It just had something to do with the competitors and seeking out advantages.

Non-compete agreements have been a default management tool for nearly 200 years in this country. The earliest case was from 1837, Allager versus Thatcher, I believe out of Massachusetts. I'll put the link in the show notes if you care to read something very old and antiquated. Employees have remained outraged and out-leveraged for far too long. It took one pandemic and a bit of election season voter influencing by the Biden administration for employees to realize coercive non-compete agreements need to be eliminated nationwide. State legislatures across the country partially agreed,

passing various state initiatives to weaken, but not eliminate non-compete agreements. I'll put the links to the show in the show notes notes as well so you can research that if you like. The FTC maintains an April 30, 2024 court pleading, which I did look up on PACER in the Eastern District of Texas, in the Injunctive Relief Action filed by the U.S. Team of Commerce against the agency. The FTC maintain the following. Non-compete clauses by their very definition restrict competition in labor and product service markets

by preventing individuals from moving freely to switch jobs or to start their own businesses. As a result, non-compete suppresses wages, dampen innovation, prevent businesses from hiring the talent necessary to be successful, and inhibits new businesses from starting. For many workers, the use of non-compete is also coercive because contracts containing non-competes are forced upon them unilaterally under circumstances which they have little to no bargaining power vis-a-vis the employer." The FTC goes on to further state, the Commission also found that for non-senior executives,

as defined by the final rule, the use of non-competes is exploitive and coercive, conduct that similarly harms both labor markets and product and service markets. For these workers, the Commission concluded that the non-competes are almost always unilaterally imposed by employers who exploit their superior bargaining power to impose without any meaningful negotiation or compensation significant restrictions on workers' ability to leave for a better job or to engage in competitive activity. Non-competes thus force employers or workers to either stay in their job they want to leave or bear other significant harms and costs

such as leaving the workforce entirely or they're field for a period of time, I call it sitting on the bench, and relocating out of their area, which does happen, in particular doctors, or violating the non-competes in facing the risk of expensive and protective litigation, which I have participated in. The FTC chair, Lina Khan, stated, quote, non-compete 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 each year once the non-competes are banned. The FTC's final role to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market. Ms. Khan has been criticized by Pro-business lobby that she has had little experience after attending Yale Law School and then going into public service, that she was anointed by President Biden and given the task that led up to this role. That is the criticism that I have read in the local papers. So the FTC press release stated, non-competes are a widespread and often exploitive practice imposing contractual conditions that prevent workers from taking a new job or starting a new business. Non-competes often force workers to either stay in a job

they want to leave or bear other significant harms and costs such as being forced to relocate or forced to leave the workforce altogether or being forced to defend against expensive litigation. That's a repeat of what the Chairman Khan and the FCC has stated. An estimated 30 million workers, nearly one in five Americans, are subject to non-competes. Now on April 24th, 2024, the US Chamber of Commerce, if you don't know who they are, they are a very large pro-business lobby along with the Business Roundtable, another pro-business lobby, filed a complaint for injunctive relief in the Eastern District of Texas.

A bit of forum shopping, indeed, given the conservative leaning of the district court in Texas. The chamber of state's on its website, quote, the Federal Trade Commission's decision to ban employer non-competitive agreements across the country is not only unlawful, but also a blatant power grab that will undermine American businesses' ability to remain competitive. Since its inception over 100 years ago, the FTC has never been granted the constitutional authority to write its own competition's rules. Non-compete agreements are either upheld or dismissed under well-established state laws governing their use.

Big businesses face a regulatory onslaught as federal agencies pursue aggressive policy changes through regulation, preventing them from innovating, growing, and hiring." Now, the U.S. Supreme Court is currently reviewing two cases, Loper-Bright Enterprises versus Raimondo, and Relentless Inc. versus Department of Commerce, challenging agency regulations and the deference courts give federal agencies. The Chamber lawsuit follows in quick step to enjoin the FTC and the plaintiff, the chamber, hopes the timing of the suit coincides

with the U.S. Supreme Court's loper and relentless decisions, scaling back federal agency power and deferential treatment by the courts. According to the complaint filed by the Chamber of Commerce, quote, the true strength of a company lies in its people. Recognizing this, many businesses invest considerable sums of training in training and development, developing their employees to maximize their potential and to hone their skills.

And in particular, for companies in highly competitive and innovative industries, those same employees serve as guardians of businesses, second most valuable asset, which is a highly sensitive and proprietary information that allows them to succeed." No company exists without its employees, and that's my opinion. However, when you place restrictions on an at-will employee's ability to leave and find similar employment, there is no loyalty by employees or among employees, only resentment, and I think you would probably agree. A majority of Outwell employees already have previous experience in training, and that

is the reason why they were hired. The Chamber's comment above presumes a focus on entry-level employees, which is misleading. Employers are already protected against potential for leakage of highly sensitive proprietary information in the form of non-disclosure and confidentiality agreements and trade ticket laws that protect their interests. The state of California, the focus, the situs point of everything, you know, technology in our country, namely Silicon Valley, doesn't have non-competes. The employees are allowed to leave ebb and flow between the different companies, and

there's no issues. What we do have is innovation. When you have that example, such as California, you ask yourself, well, why do we need non-competes if that's the same thing that the employer in the Chamber of Commerce court case here I just read about is asking for? Non-competes need to go. Companies do just fine and they innovate. I can cite one good example of why non-competes can be destructive. The state of Massachusetts actually for years had a non-compete and the technology companies around the city of Boston,

there's an area that corridor, they sought to create the next Silicon Valley. As we all understood, it failed and it didn't work because the employees couldn't ebb and flow due to non-compete agreements. The chamber complaint further asserts the following. Many businesses continue to rely on targeted non-compete agreements for these same reasons. Those agreements typically require that an employee agree as a condition of employment or an exchange for compensation that if he decides to leave the company he will not work for the employers competitors for a limited period of time thereafter. These agreements benefit employers and employees alike."

I emphasize that part. The employer protects its workforce investments and sends sensitive information and the worker benefits from increased training, access to more information, and an opportunity to bargain for higher pay. You're probably scratching your head at this point saying, you never had the opportunity to bargain for higher pay in a non-compete deal, because you didn't. The problem with the above statement, in my opinion,

is that the employees cannot choose in the marketplace because employers use non-compete agreements as a condition of employment. Employees can never negotiate the terms of these, quote, take it or leave it non-compete agreements. In my experience negotiating non-compete agreements for new hires, there is no bargaining for higher pay. The only time my clients have had the opportunity to bargain for higher pay is when they are

at the C-suite level, and I insert an additional monetary compensation for sitting on the bench and not competing for a year after the employment ends. Regular employees lack any power to bargain for higher pay, and the Chamber's assertion is false or misleading. The Chamber complaint also states, By invalidating existing non-compete agreements and prohibiting businesses and their workers from entering into such agreements going forward, the rule will force businesses all over the country, including in this district, the District of Texas, to turn to inadequate and expensive alternatives to protect their confidential information such as non-disclosure agreements and trade secret lawsuits.

And many co-workers, including highly skilled experts and executives, will be unable to bargain for increased compensation in return for non-compete agreements. I'm sick and tired of this pro-business default management trope. Employers know full well they are well protected by non-disclosure agreements, except for one, Mr. Weinstein and his company." That's how we discovered his doings, so to speak, because a woman came out and breached her non-disclosure agreement, and hence the birth of the Me Too movement. Trade secret laws are routinely used by companies to go after offending employers, employees

for that matter, and they function well by providing immediate relief for employers by the courts. Non-compete agreements were always in overreach and on September 4th, 2024, will become illegal. On April 30th, 2024, the Federal Trade Commission filed a motion to transfer venue from the Eastern District of Texas and Judge Jay Campbell, Barker, a conservative judge, from who is presiding in that case. In my opinion, the FTC wants a better venue in the Northern District of Texas where there was a corollary case filed, actually was filed first by a private party under possibly less

conservative judge, Judge Ada Brown, who was actually a first African American appointed by former President Trump and a Native American, Kokuchaw Nation Indian. In summary, the average American employee and executive are now free agents once and for all. I've told employees all the time, just negotiate like you don't have a non-compete because usually they're not enforced and we know that by practice. And now they're free to choose their own career trajectories.

No longer are employees unfairly coerced and encumbered by one-sided non-competition agreements that only, only benefit employers and only ever have. I cringe at the billions of dollars unnecessarily spent by employees and executives over the years fighting against employer lawsuits, seeking to enforce ridiculous non-compete cases. Of course, employers are pissed. And I'm glad they're pissed.

They had it for so long and for so good so long. Now the rules of the game have changed in favor of employees. And a great crack in the wall has opened in the private government castles of American workplaces and employees, they do now matter. So as a little end note to the discussion, as I usually do, I have been involved in so many non-compete cases over my career, which spans, I'm forgetting now, 28 years. The harm inflicted by these things are tremendous. And if you've ever been rubbed the wrong way by a non-compete because you couldn't go work

somewhere, you know what I'm talking about. This is an economic hit to the pocketbook like no other. Sometimes high-level executives, even just employees who are paid very well, are saddled with million-dollar handcuffs that they can't leave or they don't want to leave, but they can forfeit that money if they go work for a competitor. So I've had cases where I've gone to trial in these matters where we have brought up evidence of who's paying the mortgage, who's going to pay for the college education, and who's even going to pay for, in one case, the diapers for the young child of the individual

who's being sued by his former employer for a non-compete issue? It's ridiculous. I think courts have known this for years. I'm going to say for one thing, there is an exception. There's always the bad actor, lever, who goes to work, steals all the trade information and contacts and whatever it was and went to work her competitor and all the clients left and he or she ought to be sued and rightfully so. There are court cases that easily identify those.

But that's not the norm. The norm is the magnitude of employees across the country. And worse off, the people who work in restaurants for no reason have a non-compete, but they have them. So it's just ridiculous that this default management practice to use a non-compete all the time in every single person's employment, I'm not surprised it reached this level that somebody, some agency finally said enough's enough and here we have the Federal Trade Commission.

So if you want to know, I'm delightfully pleased. Someone asked me the other night over dinner whether I was happy about this. I am. I probably will have to entertain these types of cases a little bit more in the future, but not having to deal with this nonsense for employees, that's a great thing. As an attorney who represents them, that's a great thing. They don't have to spend money needlessly to worry about this issue. There'll probably be cases where I have to advise people, but not nearly the types of

litigation that's happened in the past. It's a good thing for American workforces. It's not a political thing. It's not something that is a matter of politics, while you have the Biden administration trying to make it so, because business are run by Republicans and Democrats alike. So figure that one out, okay? Democrats want non-competes for their employees, so it's not political. It's just this thing that happens in our country.

And I think by September 4th of this year, it'll go away. So with that, I spent a lot of time to research this before I got on the podcast with you. I wanted to have a different angle on it. I did go into the chamber case to dump down into the depths of that and look at it. I wanted to bring something more clearer to you. I think I have, this is still an ongoing issue. You're going to have developments of this. You may have the possibility that this case, that the chamber filed, they may get an injunction against the FTC.

It may rise up to the level of Supreme Court. That was their intention all along. So the, you know, September 4th may come around. You may have a limited period of time of free agency, but there may be some shifts politically. We do have a conservative federal court at the Supreme Court level, so that may change. We don't know. So the Supreme Court decisions that are currently under review, they happen to do with federal agency deference. We'll probably provide some indication to how the FTC case will run, but we'll stay tuned. But nonetheless, we'll take

this advantage. We have it now as of September 4th again. You're our free agent. And let's see how things change for the better for employees nationwide. Hope you enjoyed this one. Talk to you next week. Thanks. If you like the Employee Survival Guide, I'd really encourage you to leave a review. We try really hard to produce information to you that's informative, that's timely,

that you can actually use and solve problems on your own and at your employment. So if you like to leave a review anywhere you listen to our podcast, please do so. And leave five stars because anything less than five is really not as good, right? I'll keep it up. I'll keep the standards up. I'll keep the information flowing at you. If you'd like to send me an email and ask me a question, I'll keep it up. I'll keep the standards up. I'll keep the information flowing at you. If you'd like to send me an email and ask me a question, I'll actually review it and post it on there. You can send it to mcaru at capclaw.com. That's capclaw.com.