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A New Stance on Noncompete Clauses (Daveante Jones & Cole Henderson Commentary)

Daveante Jones & Cole Henderson Commentary
3 min read

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The Federal Trade Commission’s new Non-Compete Clause Rule means, beginning Sept. 4, employers will no longer be able to enter into noncompetition agreements with workers and the majority of existing noncompetition agreements will be invalidated. Facing great uncertainty, this Q&A provides a good starting point.

What does the rule ban?

Beginning Sept. 4, employers will be prohibited from entering into noncompetition agreements with any workers and from enforcing existing noncompetition agreements with workers other than senior executives (those who earn more than $151,164 a year and are in a “policymaking” position).

What is not impacted by the rule?

The rule does not impact noncompetition agreements entered into pursuant to a bona fide sale of a business entity; does not impact customer and employee nonsolicitation agreements; and does not prohibit confidentiality and nondisclosure agreements provided that the agreements don’t prevent workers from seeking or accepting other work or starting a business after leaving their job.

Does the rule apply to all industries?

The FTC generally does not govern banks, savings and loan institutions or federal credit unions. Regardless, decision-makers within those industries should consider planning for the rule’s potential application.

What about the legal challenges to the rule?

To date, three legal challenges have been made, including a lawsuit by the U.S. Chamber of Commerce. Employers should prepare compliance plans now, regardless of potential delays to final implementation.

How do employers prepare for a potential world without noncompetition agreements?

First, don’t panic. A major change is on the horizon, but the sky is not falling.

Second, compliance with the rule’s notice requirement is paramount. By Sept. 4, employers must provide “clear and conspicuous notice” to all workers (other than senior executives) that existing noncompetition agreements will not and cannot be legally enforced against the worker.

Third, don’t forget that certain state and federal laws exist to protect intellectual property and trade secrets, and employers maintain the ability to enter into narrowly tailored confidentiality and nondisclosure agreements with workers. Client relationships and the company’s workforce may also be protected by narrowly tailored nonsolicitation agreements.

Finally, view this as an opportunity for introspection and improvement, starting with these preliminary questions:

Does the company have the proper safeguards in place (e.g., access restricted on a need-to-know basis, stored on secure server, etc.) to protect trade secrets and intellectual property — especially in the age of remote work?

Does the company have a plan implemented to promptly collect devices and terminate access to company data once an employee leaves?

Is the company focused on customer retention strategies? What is being done to strengthen customer relationships that may lessen the impact of losing key employees?

What is the company doing to nurture a culture that improves employee retention?

Conclusion

Employers should carefully consider the rule’s impact on their organizational practices and policies. A proactive plan to bolster employee retention and safeguard business interests through alternative methods should significantly soften the rule’s ultimate impact.


Daveante Jones is a partner at Wright Lindsey Jennings in Little Rock; Cole Henderson is an associate attorney at the firm’s Rogers office.
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