Authored by Katherine M. Flett with assistance from Jack Stiens, contributor
The FTC’s recent rule effectively banning non-compete agreements is set to take effect on September 4, 2024. Before the ban takes effect, employers who have qualifying non-compete agreements in place with their employees are obligated to provide explicit notice to current and former workers that their non-compete agreement is no longer in effect and may no longer be enforced against them. Given its potential to dramatically alter employer-employee relationships and the security of proprietary information, businesses should understand and take steps to mitigate the possible consequences of the ban before September.
There are several exceptions to the new FTC ban, the most significant being the “senior executive” exception. The rule defines “senior executive” as an employee earning more than $151,164 annually (inclusive of salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation) in a “policy-making position.” The FTC defines a “policy-making position” as: (1) the President, CEO, or equivalent; (2) any other officer (Vice President, Secretary, Treasurer, CFO, comptroller, or principal accounting officer) who has policy-making authority; or (3) or any other person who has policy-making authority. It is the third prong of this definition that will likely be left to the interpretation of courts around the U.S. The FTC estimates that this class of workers accounts for less than 1% of all employees.
While there are some other narrow exceptions to the rule, a vast majority of employer-employee relationships will be subject to the new FTC ruling. Predictably, there are already several lawsuits pending against the FTC seeking a nationwide stay and injunction against enforcement of the final rule.
Regardless, businesses should consider alternative tools to protect their proprietary information. One such tool is trade secret enforcement. Trade secrets can be any propriety information that derives value from its exclusivity from the general public/competitors, such as business strategies, manufacturing processes, and consumer data. Generally, trade secrets are protected as proprietary information as long as an employer takes “reasonable measures” against improper disclosure of them. Missouri has adopted the Uniform Trade Secrets Act, along with many other states, which prohibits the disclosure of trade secrets to third parties without consent. If successful in proving a claim under the Missouri Uniform Trade Secrets Act, a business can recover the actual loss caused by misappropriation, any unjust enrichment to the employee or former employee caused by misappropriation, punitive damages, and its reasonable attorneys’ fees. Injunctive relief is also an available remedy. Employers can implement confidentiality and nondisclosure agreements to further safeguard trade secrets and other sensitive information from being compromised by current and former employees.
Another tool is the use of non-solicitation agreements, which are unaffected by the FTC ruling. Non-solicitation agreements prevent former employees from soliciting business from a previous employer’s customers or soliciting other employees to leave employment. The terms of such agreements must be “reasonable” or they will be deemed unenforceable by the court. Typically, a non-solicitation agreement prohibiting an employee from soliciting customers they were in contact with while employed by the company for a period of two years is considered reasonable and enforceable. However, unlike a non-compete agreement, a non-solicitation agreement does not prevent a former employee from seeking job opportunities with competitors. Regardless, non-solicitation agreements, when used alongside other measures, can help fill the void left by the elimination of non-competes by protecting important customer lists or preventing the poaching of talent at your company.
As the ban on non-compete agreements gets closer, it is critical for businesses to consult with legal counsel to navigate this new ban effectively.
Posted by Attorney Katherine M. Flett with assistance from Jack Stiens, law clerk. Flett is a member of the litigation team whose primary focus is on assisting clients in business litigation, employment law, real estate, insurance defense, and bankruptcy matters. Stiens, law clerk, is a student at the University of Missouri School of Law and a graduate of the University of Missouri-Columbia.