The Federal Trade Commission (“FTC”) published a proposed rulemaking on January 5, 2023, aiming to eliminate entirely the use of non-compete agreements between employers and employees, including invalidating existing agreements that employers may have entered into years earlier. The proposed rule, which will impact private employers in all states, including Georgia, is located here: https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf
What are non-compete agreements? Non-compete agreements prohibit an employee from working in a competing capacity in a particular geographic area or certain competing entities for a certain period of time post-employment. These agreements have been blessed by the Georgia Legislature through the Georgia Restrictive Covenants Act (“GRCA”). O.C.G.A. § 13-8-50 et. seq. The GRCA attempts to strike a balance between allowing restrictive covenants for certain types of “key” employees so long as they are reasonable in terms of length and geographic scope. More information about the GRCA can be found here: https://www.khlawfirm.com/the-differences-between-a-non-compete-a-non-solicit-and-a-non-disclosure-agreement-with-examples/
What is the FTC proposing? In an editorial in the New York Times, Lina M. Khan, chair of the FTC, referred to the clauses as a “clear restriction of individual liberty.” See https://www.nytimes.com/2023/01/09/opinion/linakhan-ftc-noncompete.html If the FTC’s proposed rule is enacted, it would “supersede” the Georgia law, making non-competes illegal nationwide.
The proposed law takes an extremely hard-handed approach:
- It makes non-compete agreements illegal regardless of what type of employee is at issue and regardless of what level of company information the employee has accessed.
- It expands the definition of a non-compete clause to include clauses that “effectively preclude” a worker from working in the same field after conclusion of employment or a term that requires repayment of training expenses (if not reasonably tied to actual costs).
- It requires recission of existing non-compete clauses and notification of former employees who have entered into such agreements.
The proposal carves out use of these agreements for franchisor/franchisees and sales of businesses (assuming the seller owned at least 25% of the business sold).
What should employers do now to protect their business? First, employers should review existing form employment contracts to ensure that they contain a “severability” clause. “Severability” clauses make clear that if a certain clause in a contract is determined to be unenforceable, the remaining clauses of the contract remain enforceable.
Second, employers also should review existing contracts to ensure they contain other types of restrictive covenants that prohibit departing employees from harming the company. Those restrictions are not impacted by the language of the proposed FTC rule and, in Georgia, would continue to be governed by the GRCA. For example:
- Non-solicitation agreements can prohibit departing employees from soliciting customers, employees or referral sources of the employer.
- No-service clauses can prohibit departing employees from servicing particular customers. (These types of clauses are in a grey area—its not clear whether they would be prohibited under the FTC’s proposed rule or not, but could become problematic if the effect of the covenant “effectively precludes” the employee from working in the same field). These clauses are not permitted for certain types of employees, for example medical providers.
- Robust non-disclosure agreements and confidentiality covenants can prohibit departing employees from retaining company trade secrets or other confidential information. Under certain circumstances, Georgia courts have viewed customer lists as trade secrets.
Additionally, ensuring that employment contracts contain clear provisions with respect to the employer’s ownership of any intellectual property created or accessed by the employee during the course of employment also provides an additional layer of protection with respect to the use of an employer’s sensitive information. These provisions should include an automatic assignment of any rights to such intellectual property from the employee to the employer.
If non-competes are banned, how can employers reduce the risks of harm from a departing employee? In addition to the contractual clauses suggested above, it’s a good time to take stock of how important company information is stored and shared with employees. In the post-pandemic age where employees frequently store and reference high value company information in their homes or on personal devices, theft of trade secrets has become increasingly easy for employees and may go undetected. Often, when a key employee leaves, employers only possess a suspicion that a theft of information has occurred. Tying the key employee to a non-compete allows the employer to ensure that its information is not being taken directly to a competitor for the period of time when the information is fresh (and therefore valuable).
In light of the FTC’s news, employers should consider how their most valuable company information is stored, who can access it, and what steps the employer has put in place to protect the information. Typical protections include: limiting access to only employees that need to know, limiting access to only via company-owned devices, setting up password protections for key documents, using non-disclosure agreements, and utilizing other restrictive covenants (such as non-solicits) that limits a departing employee’s ability to use any retain confidential information.
Interested parties can comment on the proposed rule here: https://www.regulations.gov/document/FTC-2023-0007-0001