Could Non-Compete Agreements Be Finished?

In addition, some industries have created option-in industry agreements, such as the financial industry’s Broker Protocol, which limits the applicability of non-competition agreements.

The Broker Protocol is a voluntary program where employers may opt into a series of rules which allow their employees to almost move from one firm freely to another firm, provided both the former and current employer are both members and the employee only takes their clients’ names, addresses, phone numbers, email addresses, and account title information.

The purpose is to minimize litigation between member firms.

An End to Non-Competes?

The FTC has sought public comment on several sweeping changes that, if enacted and deemed constitutional, would nearly eliminate the use and enforceability of restrictive covenants.

The proposed rule would broadly define the term “non-compete clause” as a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.

Further, the proposed rule would require employers to rescind almost all existing non-compete clauses no later than the rule’s compliance date and tell their employees that they are no longer subject to the restrictive covenant.

To facilitate compliance, the proposed rule would include model language to satisfy this notice provision and establish a safe harbor whereby employers inform their employees that they are no longer subject to the restrictive covenant.

The proposed rule includes a limited exception permitting the use of a restrictive covenant if it is included in the buyout of a member, partner or shareholder’s interest if they owned at least 25% ownership stake in the business entity.

Even if the FTC were to enact this legislation, it is unclear whether it could survive a constitutional test. The FTC’s purported power comes from Section 5 of the Federal Trade Commission Act. It is uncertain whether the federal courts would broadly interpret the FTC’s power to supersede state laws on the subject.

Assuming the legislation is adopted and is deemed to be constitutional, Scott advises that employers should consider the use of narrowly tailored non-disclosure, confidentiality and “garden leave” agreements to protect their legitimate business interests.

Thomas D. Giachetti is chairman of the Investment Management and Securities Practice of Stark & Stark. A former investment banker and NASD registered representative, Giachetti’s legal practice is devoted to investment-related matters, including the representation of investment advisers, financial planners, broker-dealers, CPA firms and registered reps.

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