Last year I reported that the Federal Trade Commission planned to prohibit non-competition clauses. That day has come. It has issued its final rule, which will be effective in approximately 120 days (depending on when it is published in the Federal Register). The new rule, with very limited exceptions, prohibits any contract or policy that prohibits, penalizes or functions to prevent any current or former workers (including independent contractors, volunteers and interns, etc.) from starting their own business or going to work elsewhere after their employment with the employer concludes. Prior to the effective date (in 120 days), employers are also required to notify any current and former workers (including independent contractors) who are subject to a non-compete that the non-compete is no longer enforceable. I have included the regulation's language below.
Now for the exceptions:
·
It does not apply to the sale of a business. The proposed rule’s exception only applied if
the worker owned at least 25% of the business, but that restriction has been
eliminated. The current rule does not
ban non-competes if a worker sells his or her shares or ownership
interest in the practice subject to a non-compete, etc.
·
The new rule does not require employers to
notify “senior executives” who were in a policy making position and being paid
an annual salary of more than $150K that their non-compete is no longer
enforceable; their existing non-competes remain enforceable. However, employers may no longer enter into new non-competes
with senior executives after the rule's effective date.
·
The new rule does not apply to concurrent
employment. It is still lawful to
restrict employees to working only for one employer or to restrict competition while
on a payroll or under contract. In other words, the
restrictions are only on post-employment requirements.
· The new rule does not apply to employment outside the U.S.
There is also a question about FTC jurisdiction over non-profit organizations, which could create a disparity between enforcement of these agreements by non-profit employers, but prohibited by for-profit employers.
Application:
·
It does not bar all restrictive covenants unless
they function to prevent the worker from working elsewhere or starting their
own business.
o
Non-solicitation agreements are still valid
unless they are unduly restrictive. That restriction only prevent contact with customers, not with competition.
“Non-solicitation agreements are generally not non-compete clauses under
the final rule because, while they restrict who a worker may contact after they
leave their job, they do not by their terms or necessarily in their effect
prevent a worker from seeking or accepting other work or starting a business.
However, non-solicitation agreements can satisfy the definition of non-compete
clause in § 910.1 where they function to prevent a worker from seeking or
accepting other work or starting a business after their employment ends.”
o
Non-disclosure agreements are still valid unless
they are overly broad and prevent the worker from using general knowledge and
skills or information that is already available to competitors, etc. For
instance, it could be overly broad to prevent disclosure of information that
relates to or is usable in an industry.
o
Reimbursement agreements are still valid unless
they are prohibitively punitive and/or do not apply unless the employee works
elsewhere or for him/herself. These
are tricky because the rule prohibits penalizing an employee for going to work elsewhere
by requiring them to repay training costs, etc., but notes that only requiring
the employee to repay a bonus (or to lose sick leave) if they resign within a
certain period of time are presumptively valid.
o Evergreen or garden leave agreements are still valid if the worker technically still remains employed by you even though they may not be given any work to do, etc. In other words, you can pay a worker to not work as a means of keeping them from competing for a certain period of time, but they must still remain employed by you. The rule only prohibits post-employment restrictions.
:Here is the language of the new regulation
16 CFR Part 910 Antitrust.
For the reasons set forth above, the Federal Trade
Commission adds a new subchapter J, consisting of part 910, to chapter I in
title 16 of the Code of Federal Regulations:
1. Add new subchapter J, consisting of parts 910 and 915, to
read as follows:
SUBCHAPTER J—RULES CONCERNING UNFAIR METHODS OF
COMPETITION PART 910—NON-COMPETE CLAUSES
. . .
§ 910.1 Definitions. As used in this part:
Business entity means a partnership, corporation,
association, limited liability company, or other legal entity, or a division or
subsidiary thereof. Employment means work for a person.
Non-compete clause means:
(1) A term or condition of employment that prohibits a
worker from, penalizes a worker for, or functions to prevent a worker from:
(i) 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 or condition; or
(ii) operating a business in the
United States after the conclusion of the employment that includes the term or
condition.
(2) For the purposes of this part 910, term or condition of
employment includes, but is not limited to, a contractual term or workplace
policy, whether written or oral.
Officer means a president, vice president, secretary,
treasurer or principal financial officer, comptroller or principal accounting
officer, and any natural person routinely performing corresponding functions
with respect to any business entity whether incorporated or unincorporated.
Person means any natural person, partnership,
corporation, association, or other legal entity within the Commission’s
jurisdiction, including any person acting under color or authority of State
law.
Policy-making authority means final authority to make
policy decisions that control significant aspects of a business entity or
common enterprise and does not include authority limited to advising or
exerting influence over such policy decisions or having final authority to make
policy decisions for only a subsidiary of or affiliate of a common enterprise.
Policy-making position means a business entity’s
president, chief executive officer or the equivalent, any other officer of a
business entity who has policy-making authority, or any other natural person
who has policy-making authority for the business entity similar to an officer
with policy-making authority. An officer
of a subsidiary or affiliate of a business entity that is part of a common
enterprise who has policy-making authority for the common enterprise may be deemed
to have a policy-making position for purposes of this paragraph. A natural
person who does not have policy-making authority over a common enterprise may
not be deemed to have a policy-making position even if the person has
policy-making authority over a subsidiary or affiliate of a business entity
that is part of the common enterprise.
Preceding year means a person’s choice among the
following time periods: the most recent 52-week year, the most recent calendar
year, the most recent fiscal year, or the most recent anniversary of hire year.
Senior executive means a worker who:
(1) Was in a policy-making position; and
(2) Received from a person for the employment:
(i) Total annual compensation of at least $151,164 in the
preceding year; or
(ii) Total compensation of at least $151,164 when annualized
if the worker was employed during only part of the preceding year; or
(iii) Total
compensation of at least $151,164 when annualized in the preceding year prior
to the worker’s departure if the worker departed from employment prior to the
preceding year and the worker is subject to a non-compete clause.
Total annual compensation is based on the worker’s
earnings over the preceding year. Total annual compensation may include salary,
commissions, nondiscretionary bonuses and other nondiscretionary compensation
earned during that 52-week period. Total annual compensation does not include
board, lodging and other facilities as defined in 29 CFR 541.606, and does not
include payments for medical insurance, payments for life insurance,
contributions to retirement plans and the cost of other similar fringe
benefits.
Worker means a natural person who works or who
previously worked, whether paid or unpaid, without regard to the worker’s title
or the worker’s status under any other State or Federal laws, including, but
not limited to, whether the worker is an employee, independent contractor,
extern, intern, volunteer, apprentice, or a sole proprietor who provides a
service to a person. The term worker includes a natural person who works for a
franchisee or franchisor, but does not include a franchisee in the context of a
franchisee-franchisor relationship.
§ 910.2 Unfair methods of competition.
(a) Unfair methods of competition—
(1) Workers other than senior executives. With respect to a
worker other than a senior executive, it is an unfair method of competition for
a person:
(i) To enter into or attempt to
enter into a non-compete clause;
(ii) To enforce or attempt to
enforce a non-compete clause; or
(iii) To represent that the worker is subject
to a non-compete clause.
(2) Senior
executives. With respect to a senior executive, it is an unfair method of
competition for a person:
(i) To enter into or attempt to
enter into a non-compete clause;
(ii) To enforce or attempt to
enforce a non-compete clause entered into after the effective date; or (iii) To
represent that the senior executive is subject to a non-compete clause, where
the non-compete clause was entered into after the effective date.
(b) Notice requirement for existing non-compete clauses—
(1) Notice required. For each existing non-compete
clause that it is an unfair method of competition to enforce or attempt to
enforce under paragraph (a)(1)(ii) of this section, the person who entered into
the non-compete clause with the worker must provide clear and conspicuous
notice to the worker by the effective date that the worker’s non-compete clause
will not be, and cannot legally be, enforced against the worker.
(2) Form of notice. The notice to the worker required
by paragraph (b)(1) of this section must:
(i) Identify the person who entered
into the non-compete clause with the worker;
(ii) Be on paper delivered by hand
to the worker, or by mail at the worker’s last known personal street address,
or by email at an email address belonging to the worker, including the worker’s
current work email address or last known personal email address, or by text
message at a mobile telephone number belonging to the worker.
(3) Exception.
If a person that is required to provide notice under paragraph (b)(1) of this
section has no record of a street address, email address, or mobile telephone
number, such person is exempt from the notice requirement in paragraph (b)(1)
of this section with respect to such worker.
(4) Model language. For purposes of paragraph (b)(1)
of this section, the following model language constitutes notice to the worker
that the worker’s non-compete clause cannot legally be enforced and will not be
enforced against the worker.
Figure 1 to paragraph
(b)(4)—Model Language
A
new rule enforced by the Federal Trade Commision makes it unlawful for us to
enforce a non-compete clause. As of
[DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE],
[EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES
BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:
·
You may seek or accept a job with any company or
person -- even if they compete with [EMPLOYER NAME].
·
You may run your own business -- even it
competes with [EMPLOYER NAME].
·
You may compete with [EMPLOYER NAME] following
your employment with [EMPLOYER NAME].
The
FTC’s new rule does not affect any other terms or conditions of your
employment. For more information about
the rule, visit [link to final rule landing page]. Complete and accurate translation of the
notice in certain languages other than English, including Spanish, Chinese,
Arabic, Vietnamese, Tagalog and Korean, are available at [URL on FTC’s
website].
(5) Safe harbor. A person complies with the
requirement in paragraph (b)(1) of this section if the person provides notice
to a worker pursuant to paragraph (b)(4) of this section.
(6) Optional notice in additional languages. In
addition to providing the notice required in paragraph (b)(1) of this section
in English, a person is permitted to provide such notice in a language (or in
languages) other than English or to include internet links to translations in additional
languages. If providing optional notice under this paragraph (b)(6), a person
may use any Commission-provided translation of the model language in paragraph
(b)(4) of this section.
§ 910.3 Exceptions.
(a) Bona fide sales of business. The requirements of
this part 910 shall not apply to a non-compete clause that is entered into by a
person pursuant to a 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.
(b) Existing causes of action. The requirements of
this part 910 do not apply where a cause of action related to a non-compete
clause accrued prior to the effective date.
(c) Good faith. It is not an unfair method of
competition to enforce or attempt to enforce a non-compete clause or to make
representations about a non-compete clause where a person has a good-faith
basis to believe that this part 910 is inapplicable.
§ 910.4 Relation to State laws and preservation of
State authority and private rights of action.
(a) This part 910 will not be construed to annul, or exempt
any person from complying with any State statute, regulation, order, or
interpretation applicable to a non-compete clause, including, but not limited
to, State antitrust and consumer protection laws and State common law, except
that this part 910 supersedes such laws to the extent, and only to the extent,
that such laws would otherwise permit or authorize a person to engage in
conduct that is an unfair method of competition under § 910.2(a) or conflict
with the notice requirement in § 910.2(b).
(b) Except with respect to laws superseded under paragraph
(a) of this section, no provision of this part 910 shall be construed as
altering, limiting, or affecting the authority of a State attorney general or
any other regulatory or enforcement agency or entity or the rights of a 568
person to bring a claim or regulatory action arising under any State statute,
regulation, order, or interpretation, including, but not limited to, State
antitrust and consumer protection laws and State common law.
§ 910.5 Severability. If any provision of this
part 910 is held to be invalid or unenforceable by its terms, or as applied to
any person or circumstance, or stayed pending further agency action, the
provision shall be construed so as to continue to give the maximum effect to
the provision permitted by law and such invalidity shall not affect the
application of the provision to other persons or circumstances or the validity
or application of other provisions. If any provision or application of this
part is held to be invalid or unenforceable, the provision or application shall
be severable from this part 910 and shall not affect the remainder thereof.
§ 910.6 Effective date. This part 910 is
effective [INSERT DATE 120 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE].
