Daniel Barnes is a Member of the Firm practicing in the CSG Law Employment Law Group. He advises clients regarding all types of business and litigation issues, including contract and partnership disputes, employment covenant and related litigation, tortious interference claims, and other matters. He can be reached at [email protected] or (973) 530-2097.
Federal and state law regarding the enforceability of covenants not to compete has never been more uncertain. Employer’s agreements with their employees have traditionally been the province of state law, and states are increasingly seeking to invalidate such clauses. More worrisome, recent federal action has led to disarray in the law.
On April 23, 2023, the Federal Trade Commission by a 3-2 vote adopted a new set of regulations that effectively bar such clauses in the future, and prevent enforcement of existing such agreements for all but a narrowly defined group of so-called “Senior Executives.” Not surprisingly, the first lawsuits challenging the FTC action were filed the day of and the day after the FTC’s action, including one filed by the United States Chamber of Commerce, joined by local Texas business groups, in a federal district court in Texas.[1] The Texas lawsuit included a motion for the stay of enforcement of the new regulations until the litigation is resolved, a motion which is usually granted when federal regulations are contested.[2] As a result, the new regulations may not come into effect for years as the litigation winds its way through the federal court system, likely with a final decision by the United States Supreme Court. The essential question becomes what should employers and human resources managers do to protect their business interests in the wake of this uncertainty?
The most important thing to remember is that covenants not to compete have never been the sole way, or even the best way, to protect employers from having their proprietary or confidential information used by a former employee for the benefit of a competitor. Employers continue to have the right to insist that employees sign confidentiality agreements to maintain the secrecy of information and documents that are proprietary or confidential. Those sorts of agreements may last until the information is no longer confidential or proprietary, which means that such clauses may never expire. The FTC’s new regulation does not change the enforceability of such clauses, and state laws generally permit their enforcement.
Employers also continue to have the right to bar employees from soliciting the employer’s customers and employees to move on to a competitor. Non-solicitation clauses must – as they always have – protect a legitimate business interest and be tailored to protect the legitimate business interests of the employer. Usually, non-solicits are limited to customers with whom the employee interacted and must be limited to a reasonable amount of time. Importantly, however, the FTC regulations left confidentiality agreements and non-solicitation clauses in place. As a result, if employers act prudently, they will be able to protect their confidential and proprietary information from being disseminated when an employee leaves and prevent that former employee from calling on the company’s customers or employees once he or she leaves. Even if the FTC regulations survive judicial scrutiny, which will mean that new covenants not to compete are barred, human resources managers still have arrows left in the quiver to protect the company’s business needs.
Right now, employers should conduct a review of what agreements are in place, and ensure that they have the protections they need, and that they will survive regardless of how the courts rule on the new FTC regulations. In this era of uncertainty, employers should take stock of their current approach and adapt to the new environment. Focusing on covenants not to solicit and confidentiality agreements will in most cases provide employers with the protection they need, but steer clear of any potential legislative or regulatory bar on covenants not to compete. For example, an employer remains permitted to bar an employee from using customer information (such as buying needs, prices, or sales methodology) owned by the company (and which are truly confidential) or from taking company business methodology (such as proprietary technology or business plans) with them to another employer. Similarly, an employee can be barred from contacting customers of the current employer once he or she leaves, so long as the restriction is reasonable in time and the restriction is not too broad.
With these approaches, employers may still protect their interests regardless of how the FTC’s regulations are reviewed by the Courts.
[1] The Chamber of Commerce’s lawsuit was later stayed in favor of the action also filed in Texas on the day the FTC vote took place. See https://ecf.txed.uscourts.gov/doc1/175113846497. That action is captioned “Ryan v. Federal Trade Commission, Civil Action No. 3:24-cv-00986-E, venued in the United States District Court for the Northern District of Texas, located in Dallas Texas. https://ecf.txnd.uscourts.gov/cgi-bin/DktRpt.pl?781212585029182-L_1_0-1. The FTC is also facing a challenge to its rule in Philadelphia federal court by a Pennsylvania-based tree trimming company. That action is captioned “ATS Tree Services, LLC v. FTC,” Civil Action No. 2:24-cv-01743-KBH. See https://ecf.paed.uscourts.gov/cgi-bin/DktRpt.pl?141789211157311-L_1_0-1
[2] https://ecf.txnd.uscourts.gov/cgi-bin/DktRpt.pl?781212585029182-L_1_0-1
