ALERT: FTC Non-Compete Rule a Game Changer
By: Judd A. Genda & Robert C. Procter | Axley Brynelson, LLP
The Federal Trade Commission (FTC) has issued its final Non-Compete Rule, slated to take effect on September 4, 2024. This groundbreaking regulation prohibits employers from entering, enforcing, or attempting to enforce post-employment non-compete clauses. It also invalidates existing non-compete agreements, with limited exceptions. As expected, several legal challenges to the rule have already been filed, potentially delaying its effective date or leading to its eventual overturning. But as of now, the rule remains set to go into effect as scheduled.
Non-Compete Clause Defined
In the insurance industry, contracts often feature non-competition, non-solicitation, non-disclosure, anti-piracy, and other restrictive covenants. Under the new FTC rule, a non-compete clause is defined as:
A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- 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
- Operating a business in the United States after the conclusion of the employment that includes the term or condition.
The rule clarifies that “term or condition of employment” encompasses any contractual term or workplace policy, whether written or oral. Thus, the rule bans clauses restricting a former employee from employment with named competitors, from employment with businesses offering similar services within a geographic area, or from providing competitive work within specifically named territories.
Non-Solicitation and Non-Disclosure Clauses Are Not Prohibited
The rule does not ban non-solicitation clauses that restrict a former employee from soliciting customers of the employer. It also does not ban non-disclosure clauses that prohibit a former employee from divulging confidential information such as customer contacts, pricing, methods, and other forms of proprietary information. However, these provisions remain subject to state laws that may limit their scope with respect to former employees.
The Rule Applies Retroactively
The new rule will ban all non-compete clauses regardless of when the agreement was signed (including those signed before the effective date of the new rule), except for those related to senior executives.
Exception for Senior Executives
Employment agreements with senior executives—defined as those in policy-making positions earning at least $151,164 in the preceding year—are exempt and can remain in effect after the rule’s effective date. But non-compete clauses cannot be included in new employment agreements with senior executives after implementation of the rule.
Bona Fide Sale Exception
Non-compete clauses between a seller and purchaser pursuant to a bona fide sale of a business entity, ownership interest, or all or substantially all of a business’s operating assets are exempt. Therefore, the new rule does not prohibit traditional non-compete provisions in agency or book of business sale transactions.
Current Violations of Non-Competes
The rule does not apply to prohibit enforcing a non-compete when the violation occurred prior to the effective date of the rule.
Duty to Inform Employees
The rule requires employers to provide clear and conspicuous notice to employees by its effective date that their non-compete clause will not be, and cannot legally be, enforced against the employee. The rule contains model language for the notice.
Conclusion
Insurance agents should closely monitor the legal challenges to this new rule. If it withstands scrutiny and goes into effect, you must notify individuals subject to non-compete provisions. Review your current agreements to ensure compliance. Similar protections may be often achieved through non-solicitation and enhanced non-disclosure provisions. It is crucial to comply not only with the new FTC rule but also with relevant state laws.
This information is provided for the convenience of PIAW members, but cannot be construed as legal advice. Members of PIAW may call (608) 200-4221, or email their questions to insurancehotline@axley.com, to work with an attorney and receive legal information specific to your situation.