By Kana Caplan and Jack Cartwright
On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to ban employers from using noncompete agreements with employees. The rule, first proposed in January 2023, prohibits businesses from entering into new noncompete agreements with any employees. Businesses, however, will be able to enforce existing non-compete agreements against senior executives but will no longer be able to enter into new noncompete agreements with senior executives. The rule is scheduled to become effective in early September 2024.
At least one lawsuit has already been filed seeking to stop the implementation of the Rule. It is not clear the law will become effective in September 2024 given these challenges. Nevertheless, employees may not understand the legal status of the Rule, its legal implications, and may become cavalier in breaching existing agreements with employers.
I. Details of the New Rule
As part of the new Rule, employers must provide current and former employees subject to a noncompete agreement—other than “senior executives”—notice that they will not enforce any noncompete agreement against them. The FTC has provided model notice language for businesses to use when communicating to current and former employees that their noncompete agreements will not be enforced.
The rule defines senior executives as 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 workers’ departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.
The rule further defines a “policy-making position” as
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.
Noncompetes between franchisors and franchisees and those entered in connection with the sale of a business are carved out of the rule.
The rule will become final 120 days after publication in the Federal Register, which will likely be in early September 2024. Nonetheless, business groups opposing the rule are expected to take action to try to prevent its implementation. Indeed, as of this writing, the U.S. Chamber of Commerce and other business groups have already filed a lawsuit in the Eastern District of Texas seeking to prevent the rule’s implementation.
II. Further Turmoil in this Legal Space is Expected
Krevolin & Horst expects that the new rule will not be implemented due to court challenges. In support of its authority to issue the Rule, the FTC points to Section 5 of the FTC Act of 1914 allowing the FTC to investigate and prosecute “unfair methods of competition[.]” Until the legal challenges to the Rule are resolved, it is not clear how Georgia state courts will deal with the Rule. Georgia courts may view noncompete agreements as “illegal” per se and void contracts which cannot be enforced under Georgia law.[1] The GRCA provides that “[n]othing in this article shall be construed or interpreted to allow or to make enforceable any restraint of trade or commerce that is otherwise illegal or unenforceable under the laws of the United States or under the Constitution of this state or of the United States.”[2]
While presumably a Georgia state court would not purport to nullify a law of the United States, it is possible that federal courts sitting in Georgia would find that the Rule does not preempt the GRCA and refuse to enforce it. Non-competes have been traditionally reserved to the states to regulate. “When Congress has enacted legislation in an area traditionally regulated by the states, there is an assumption that the states’ powers are not to be superseded by the federal law unless that was Congress’s clear and manifest purpose.”[3] Although the FTC claims that Section 5 grants “clear and manifest” authority for the Rule, it is not so clear. FTC Commissioner Christine S. Wilson dissented from the Proposed Rule in January 2023. [4] In her comments, she takes aim at the FTC’s interpretation of Section 5. She states there is no “clear authorization” from Congress to promulgate rules on competition under Section 5. Ms. Wilson also contends that the major questions doctrine likely bars the FTC from adopting the Proposed Rule as a workaround for the legislative process to resolve a question of political significance, and the non-delegation doctrine likely bars the FTC’s actions.
III. What Should Employers Do To Protect Their Business?
In light of the uncertainty created by the Rule and likely legal challenges, employers in Georgia should evaluate their employment and other agreements that contain noncompete covenants to ensure their business is protected. First and foremost, until the Rule is enacted, employers should continue to utilize noncompete agreements consistent with past practice, but being mindful that if the Rule is actually implemented, they may need to take corrective action to be in compliance with the Rule. Additionally, employers must take prophylactic steps to protect their arrangements with employees and independent contractors including:
- 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.
- 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 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.
- Importantly, many employee non-solicit clauses drafted prior to July 2023 are likely not enforceable. The Georgia Court of Appeals recently determined that employee non-solicit clauses must contain a geographic restriction in order to be enforceable.[5] The conventional wisdom prior to this decision was that no geographic restriction was necessary. More information about this decision is available here: https://www.khlawfirm.com/client-alert-recent-georgia-court-of-appeals-interpretation-of-the-restrictive-covenants-act-and-clarification-on-blue-penciling/
- Garden leave agreements can be used long as an employee continues to be paid and considered an “employee” even though the employee may have no continuing employment duties.
- 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.
- Ensure that employment agreements 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. This 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.
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 but lack concrete evidence. 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). If this tool disappears, it is crucial to maintain valuable company information in a fashion that is protected and tracked.
Employers should consider how their most valuable company information is stored, who can access it, what access records are logged and maintained, 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 limit a departing employee’s ability to use any retained confidential information.
If you have any questions or need any further assistance regarding the FTC’s rule banning noncompete agreements, please contact Kana Caplan (Caplan@khlawfirm.com), or Jack Cartwright (Cartwright@khlawfirm.com).
[1] O.C.G.A. § 13-8-1 (“A contract to do an immoral or illegal thing is void.”).
[2] O.C.G.A. § 13-8-59.
[3] Wyeth v. Levine, 555 U.S. 555, 565 (2009).
[4] Federal Trade Commission, Dissenting Statement of Commissioner Christine S. Wilson Regarding the Notice of Proposed Rulemaking for the Non-Compete Clause Rule (Jan. 5, 2023 10:00AM), https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetewilsondissent.pdf.
[5] N. Am. Senior Benefits, LLC v. Wimmer, No. A23A0162, 2023 WL 3963931 (Ga. Ct. App. June 13, 2023).
