The security of many employers was shaken to the core earlier this year when the Federal Trade Commission announced a ban on the use of non-compete clauses in employee contracts. 

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These contracts have been in existence and used for decades to ensure that an employee will not use information learned or developed at their current company to either start their own business or take secrets to a competitor once they leave. But on April 23, the Federal Trade Commission banned these agreements.

According to the FTC, “this will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”  

What does the ruling mean for Arizona businesses? According to Haley A. Harrigan, shareholder of Gallagher & Kennedy. “After the effective date, September 4, businesses will not be able to enter into any non-compete agreements with their staff, whether they be employees, independent contractors, interns, or volunteers and that is subject to only a few exceptions. It is essentially a blanket ban on non-compete agreements nationwide.” 

What the ruling means

According to Harrigan, these are some of the key takeaways from the final rule:

• The rule bans all non-compete agreements for almost all workers, regardless of title, job function, or compensation, after the effective date.

• Existing non-competes with “senior executives” that were entered into before the rule becomes effective will remain in effect. No new non-competes with senior executives may be entered into after the effective date. Senior executives are workers who earned at least $151,164 annually (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments); and are in a “policy-making position,” meaning the CEO, president, or any other officer or person who has “policy-making authority.” 

• Other existing non-competes are void as of the effective date. Employers must provide proper notice by the effective date to all affected workers (both past and current) that their non-compete agreement is legally unenforceable and will not be enforced.

• This ban does not include prohibitions on competing during employment with the employer.

• The rule does not apply to a non-compete clause in connection with the “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” There is no percentage of ownership required for the exception to apply.

• The rule does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date”—i.e., the regulation does not make currently ongoing litigation seeking to enforce a non-compete unlawful.

• The rule does not apply to non-competes between franchisors and franchisees. However, the rule does apply to workers working for a franchisee or franchisor.

• The rule does not apply to non-profits and certain industries including banks, federal credit unions and common carriers.

• Non-solicitation provisions do not appear to be covered by the rule unless they are overbroad and “function to prevent” a worker from seeking or accepting other work or starting a new business after employment ends.

• The rule preempts all state laws addressing non-competes to the extent they are less restrictive.

Protecting businesses

The biggest concern employers have had since the ruling is, “protecting clients and confidential information,” according to Kristy L. Peters, office managing shareholder of Littler. “That’s why employers use these agreements and want these agreements. They are putting their employees in trusted positions and they have access to trade secrets and confidential information.”  

With the ruling in place, it is advised that employers act sooner rather than later, whether FTC’s ruling gets appealed or banned for good. 

“Companies need to evaluate what they are trying to protect,” Harrigan says, “and categorize that into the confidential information they have and document that through a narrowly tailored agreement.” 

Harrigan says the first thing businesses should be reviewing are their safety measures.

“Password protection, encryption, monitoring systems and exit interview agreements are all excellent ways to lock down confidential information,” Harrigan says. “Have employees sign an exit certification form to verify compliance with any confidential information agreement that the company has and state they have returned all company items.”  

Joshua R. Woodard, partner of Snell & Wilmer, says another thing businesses should be looking at is how narrowly tailored their documents are because, “If the new document is merely trying to prevent competition, it won’t be enforceable.”  

Experts say it is vital that companies recognize different alternatives to a non-compete agreement if the ruling goes into effect Sept. 4, as scheduled. 

“The way to protect a business’ customer base is through a non-solicitation agreement, which means an employee cannot solicit business from customers with whom it worked while they were there,” says Amy Abdo, director of business litigation at Fennemore. “The most common are 12-month agreements, so employees are ‘hands off’ those customers so the person hired to fill the former employee’s position has time to build a strong relationship with those customers.”  

When it comes to intellectual property, Abdo says companies can protect themselves through a non-disclosure agreement, which states that an employee may not disclose any confidential information or trade secrets for purposes other than serving that business. However, companies need to pay attention to what is truly confidential, or the document can be deemed too broad. 

What is confidential? Abdo says, “Does the report say confidential? Is there a ledger that says it’s confidential? Do you leave it laid out in the conference room?”  

So, what can business leaders expect moving forward. Will non-competes be a thing of the past?

“Many lawsuits have been filed, including from the U.S. Chamber of Commerce and an injunction could take place by early July,” Harrigan says. 

Businesses are still faced with immense fear at the potential ban for non-compete agreements since an employee can leave for another company anytime they want and take with them the knowledge and secrets they learned at their former job. 

“Employers rely on those agreements to have as many resources as possible,” says Susanne E. Ingold, president at Burch & Cracchiolo, says, “but non-solicitation and non-disclosure agreements will do the job to protect employers.” 

The bottom line is that this ban could be a real possibility and businesses should act now because, “even if it is struck down and never goes into effect, the Federal Trade Commission can still bring enforcement action against employers,” Halligan says. “They will be closely monitoring businesses who use overly broad non-compete agreements.”