On April 23, 2024, the Federal Trade Commission (the “FTC”) issued a final rule available HERE determining that non-competes in the United States are anti-competitive and, therefore, will be federally banned effective 120 days after the rule is published in the federal register (the “Effective Date”). Specifically, the final rule provides that it is a violation of Section 5 of the FTC Act for employers to enter into non-competes with workers after the Effective Date. There is a carve-out for Senior Executives, which the rule defines as workers earning more than $151,164 annually and who are in a “policy-making position,” and which maintains that existing non-competes with Senior Executives may remain in effect.
Does the Employer have any obligations to employees with existing non-competes in place?
Yes. Prior to or by the Effective Date, Employers must notify employees with existing non-competes that these non-competes will no longer be enforceable after the Effective Date. Specifically, the form of the notice to the employer must:
- Identify the person who entered into the non-compete clause with the worker;
- 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.
An exception to the notice requirement is when the employer, company, or individual that is required to provide the person subject to the non-compete with notice has no record of a street address, email address, or mobile telephone number. In such a case the notice requirement will not apply.
The FTC has also provided a model form of Notice that may be used to comply with this requirement instead of creating a notice. You can get a copy of it by clicking HERE.
Does this ban apply to independent contractors or just employees?
The ban applies to anyone who has provided services, whether paid or unpaid, and without regard to the worker’s title or the worker’s status under any other State or Federal laws, and includes employees, independent contractors, externs, interns, volunteers, apprentices, or a sole proprietor who provides a service to a person. The definition further states that the term “worker” includes a natural person who works for a franchisee or franchisor.
Who does the non-compete ban not apply to? Who can it still be enforced against?
Non-competes will still be enforceable against franchisees in a franchisor-franchisee relationship, where a cause of action related to a non-compete clause accrued prior to the effective date, and where a non-compete that a natural person is subject to was entered into 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.
What can a business/business owner do to protect itself against hostile competitive actions? What laws are still in place to help protect your business?
For years, businesses have used non-disclosure agreements which include confidentiality provisions (often referred to as an “NDA”) . These are typically designed in such a way as to protect a business’s trade secrets. Before considering the below, keep in mind that first, you must determine that what you are trying to protect is, in fact, a trade secret (i.e. information that is not publicly available, that the business has taken steps to protect from access or from being known to the general public, has taken steps to prevent ‘just anyone’ within the business itself from having access to the information, and that is derived from money and/or effort that the company put into developing the trade secret information). This could be a secret formula (think Coca Cola’s famous trade secret recipe), in some cases – client lists, marketing plans, business growth strategy, and other information that you would consider the “secret sauce” or a component of the “secret sauce” that contributes to your business’s success.
On May 11, 2016, President Obama signed the Defend Trade Secrets Act (the “DTSA”) into law. This important piece of legislation created a federal, private, civil cause of action for trade-secret misappropriation in which “[a]n owner of a trade secret that is misappropriated may bring a civil action . . . if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” Defend Trade Secrets Act of 2016, S. 1890, 114th Cong. § 2 (2016). Where the trade secret is “willfully and maliciously misappropriated,” a court may award double the damages amount already awarded and may award attorney fees where the misappropriation was in bad faith, or where a motion to terminate is made or opposed in bad faith. While the DTSA does not pre-empt state laws, such as Florida’s Uniform Trade Secrets Act (“FUTSA”) under Florida Ch. 688, it provides an additional mechanism by which business owners can recover against a former employee, contractor, or other natural person, that misappropriates trade secret(s). FUTSA also provides for double recovery if willful and malicious misappropriation is found to exist.
In addition to NDAs and trade secret protection, other restrictive covenants like non-solicitation provisions may be useful. Non-solicitation provisions in agreements are usually designed to prevent a former employee or independent contractor from trying to take (“solicit”) company employees, clients, or in some cases, vendors and strategic alliances, to follow the former employee or independent contractor. While these provisions are generally subject to reasonableness requirements in scope and time, and must be demonstrated as necessary to protect a legitimate business interest, they are still useful tools that companies may employ when there is genuine concern over a high-level employee or contractor unfairly taking advantage of the knowledge they gained from working with or for a company.
In short, even before the new FTC ban on non-competes, your business should be doing the following:
- STEP 1: Identify your business’s trade secrets (Note: if you’re not sure what they are, your business attorney, and in some cases, an experienced insurance broker versed in the realm of insuring a company’s intellectual property assets, should be able to help you identify this).
- STEP 2: Take steps to protect your trade secrets including, at a minimum, the following:
- Restricting access to the trade secret information to only the employees, contractors, or executives that need to have access to this information.
- Making sure the trade secret information, if electronically stored, is stored in a password protected drive, folder, document, or cloud storage system.
- Make sure those who have access to the trade secret information are trained on how to keep the trade secret information safe from the access of others.
- Have employees, contractors, interns, and anyone with access to the trade secret information sign a confidentiality agreement that carefully defines trade secret to make clear, without disclosing the trade secret, what information is being protected.
- STEP 3: Take steps to enforce any confidentiality agreements and misappropriation of trade secrets as necessary, including, but not limited to pursuing claims against anyone who misappropriates the trade secret(s).
By: Michelle K. Suarez, Esq.
Published: April 24, 2024
Michelle is the CEO and Founder of the Firm, and Partner in FELPA’s Fort Lauderdale office. She has litigated and negotiated several non-compete matters in the last decade on both the plaintiff and defense side. Michelle regularly serves as outside general counsel to startups, serial entrepreneurs, and businesses in various emerging industries including tech, e-commerce, retail, professional services, insurance, and energy.
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