Category Archives: Noncompete/Trade Secret

August 21, 2024

The FTC’s Noncompete Ban Is Dead—For Now

Steven Eheart

Employers finally have the answer they’ve been waiting for: they don’t need to comply with the Federal Trade Commission’s (“FTC”) Rule banning noncompete agreements—for now.

The FTC’s Rule was set to go into effect on September 4, 2024. But, on August 20, 2024, a federal judge from the Northern District of Texas set aside the Rule and barred the FTC from enforcing it. The same judge previously put the Rule on hold as to only the parties who brought the lawsuit, but this new decision applies to all employers.

Mark Wiletsky

The Court rejected the Rule for two reasons: 1) the Rule exceeded the FTC’s statutory authority, and 2) the Rule is arbitrary and capricious.

The Court found that the plain language of the Federal Trade Commission Act (FTCA) does not expressly give the FTC authority to create substantive rules regarding unfair methods of competition. Additionally, the Court found that even if the FTCA empowers the FTC to create some rules, it only empowers rulemaking related to unfair or deceptive acts or practices—and noncompete agreements are not unfair or deceptive practices. In the end, the Court stated that the “role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.” Read more >>

July 31, 2024

Second Decision on FTC’s Noncompete Ban Is In

Annie Stuller

By Annie Stuller

On July 23, 2024, a federal judge from the Eastern District of Pennsylvania declined to issue a preliminary injunction that would block the Federal Trade Commission’s (“FTC”) rule banning most noncompete agreements, current and future, that is set to take effect on September 4 (“Rule”).

In reaching this decision, the judge concluded that the plaintiff failed to demonstrate a substantial likelihood of success on the merits. First, the judge rejected the plaintiff’s argument that Section 6(g) of the Federal Trade Commission Act (“FTC Act” or “Act”) only authorizes procedural rulemaking, explaining it “is inherently inconsistent and therefore untenable” to read the word “procedural” but not “substantive” into the FTC Act when neither word appears within the Act. She explained, “it [is] clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” Second, unpersuaded by the plaintiff’s supporting reasons, the judge rejected the plaintiff’s alternative argument that—even if the FTC Act empowers the FTC with authority to make substantive rules—the FTC exceeded its authority by banning all noncompete agreements. Read more >>

July 10, 2024

FTC’s Noncompete Ban On Hold…For Parties Involved in Lawsuit

Mark Wiletsky

By Mark Wiletsky and Annie Stuller

On July 3, 2024, a federal judge from the Northern District of Texas barred the Federal Trade Commission (“FTC”) from enforcing its Rule banning noncompete agreements and paused the Rule’s effective date of September 4, 2024. However, the judge limited the scope of her preliminary order to the plaintiff (Ryan LLC) and plaintiff-intervenors (the U.S. Chamber of Commerce and other business associations), declining to pause the Rule nationwide. As a result, for all other employers, this Rule is still set to take effect on September 4, absent further action by this court or another court in which a challenge to the Rule is pending.

Annie Stuller

The challenged Rule broadly bars employers from entering noncompete agreements with employees, invalidates existing agreements except for highly compensated individuals in a policymaking position, and requires employers to provide notice to current and former employees bound by existing agreements that the agreement will not be enforceable once the Rule takes effect.

In siding with the plaintiff and plaintiff-intervenors, the judge reasoned that the FTC lacked statutory authority under Section 6(g) of the Federal Trade Commission Act (“FTC Act”) because it is a “housekeeping statute” that only authorizes procedural—not substantive—rulemaking. She reached this conclusion by looking to “the text, structure, and history of the FTC Act.” The judge further concluded that the Rule violates the Administrative Procedure Act’s prohibition against arbitrary and capricious rules “because it is unreasonably overbroad without a reasonable explanation.” Employers should keep in mind that these conclusions were based on a “substantial likelihood” of success on the merits, signaling the judge will likely (but not certainly) rule in favor of the plaintiff and plaintiff-intervenors. Read more >>

April 24, 2024

FTC Bans Noncompetes

Little V. West

By Little V. West

The Federal Trade Commission (FTC) has issued a new rule broadly banning noncompete agreements, marking a sea change in their regulation, which previously has been primarily governed by state law. Once effective, existing noncompete agreements will generally become unenforceable, except for certain highly compensated senior executives. Future noncompete agreements will not be allowed. (See § 910.2). An exception to the rule may apply if the restricted party is selling a business entity, its ownership interests, or operating assets as part of a bona-fide sale. (See § 910.3 (a)). The rule is expected to take effect 120 days after its publication in the Federal Register. Read more >>

January 6, 2023

FTC Proposes A New Regulation That Kicks Non-Competes to the Curb

By Jeremy Merkelson and Jordan Walsh

Jordan Walsh

On January 5, 2023, the FTC issued a Notice of Proposed Rulemaking (“proposed Rule”) that would ban most non-competition agreements in the United States and put to the wastebin the 50-state patchwork of laws that currently govern the enforceability of such covenants across the country.

The proposed Rule bars post-employment non-competes with “workers” (defined to include not only employees but also independent contractors and others). This fact sheet published on the FTC’s website provides policy-related information about the FTC’s reasoning for the ban.

The proposed Rule sweeps within its ambit not only non-competition covenants that bar workers from new employment but also “de facto” agreements that the FTC considers to be unfair, including non-disclosure, non-solicitation and other covenants that have “the effect of prohibiting 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.”

As drafted, the proposed Rule contains no exclusions for management, protection of trade secrets or other exemptions that state laws currently provide. The sale of business exception that typically allows sellers of a business to be subject to non-competition covenants in favor of the acquiror is preserved to some extent by the proposed Rule, but only if the seller holds a “substantial” interest in the company being sold, which is pegged at 25% or greater of the company’s equity—a high threshold that could effectively do away with many sale-of-business non-competes currently in place. If the proposed Rule is adopted, companies would be required to provide notice to both current and former employees to notify them that their non-competes are no longer in effect and may not be enforced against them. Read more >>

December 5, 2022

Can An Employee Be Required to Sign a Noncompete Agreement Before They Receive Their Final Paycheck?

Juan Obregon

By Juan Obregon

Question: Can we require an employee to sign a noncompete agreement before they receive their final paycheck?

Answer: In short: no, employers cannot withhold an employee’s final paycheck until they sign a non-compete. Doing so likely violates Colorado’s restrictive covenant statute (Colo. Rev. Stat. 8-2-113) and the Colorado Wage Claim Act (Colo. Rev. Stat. 8-4-101, et seq).

Under Section 8-4-109 of the Colorado Wage Claim Act, when the employer terminates an employee, “wages or compensation for labor or service earned, vested, determinable, and unpaid at the time of such discharge is due and payable immediately.” When an employee quits “the wages or compensation shall become due and payable upon the next regular payday.” Either way, if the employee performed the labor to earn those wages, they are due and failing to pay it timely could subject the employer to significant penalties. Read more >>

July 22, 2022

Very Bad Year for Wyoming Noncompetes (And What You Can Do To Improve Yours)

by Brad Cave

Brad Cave

The Wyoming Supreme Court decided four cases in the last 12 months against the enforcement of employees’ agreements not to compete with their former employer. Although each case was unique, the tenor and direction of these decisions are bad news for Wyoming employers who rely on noncompete agreements. In addition, one of the rulings requires Wyoming employers to immediately review the reasonableness of the geographic scope and time covered by their noncompete agreements and perhaps modify those terms, or they risk being unable to enforce the agreement at all. You should act now to improve your odds of enforcing the agreements against disloyal former employees. Here’s our take on the steps you should take.

Confirm your noncompetes are supported by consideration

Contracts must be based on consideration—something of value—exchanged between the parties. All employees have employment contracts with their employers, which are supported by consideration of the job itself with its promise of payment of wages. When noncompete agreements are signed at the time of hiring, the job is the consideration. When an employer asks employees to sign a noncompete after employment begins, they must give new consideration beyond just keeping the job. Consideration can consist of anything of value that is specifically offered and accepted in exchange for the noncompete, but without new consideration, the post-hire noncompete is not enforceable. Read more >>

November 10, 2021

The Disappearing Future of Non-Compete Agreements

By Jeremy Ben Merkelson, Tyson Horrocks, S. Jordan Walsh, Shaun Kennedy, and Brit (Brittany) Merrill

ERE Recruiting Intelligence

Republished with permission ERE Media, Inc. Originally appeared in the November 10, 2021 online edition of ERE.net

For the last two decades, with the principal exception of California and a handful of other jurisdictions, non-competition covenants have been a standard component of the defense architecture for U.S. companies to protect valuable confidential information and trade secrets from falling into the hands of a competitor. Over time, though, this tool has been dramatically curtailed.

Hostility to non-competition agreements is growing. In July, President Biden deputized the Federal Trade Commission (FTC) to explore nationwide restrictions on their use. Additionally, in the last five years, state-law restrictions on entering into non-competition agreements with low-wage earners have been adopted in Illinois, Maine, Maryland, New Hampshire, New York, Rhode Island, Virginia, and Washington (and the District of Columbia will see new restrictions take effect in April 2022). Read more >>

April 10, 2018

Colorado Non-compete Law for Physicians Amended To Allow Continuing Treatment For Rare Disorders

Mark Wiletsky

by Mark Wiletsky

The Colorado legislature recently added a paragraph to the state statute that governs non-compete agreements to permit physicians to continue to treat patients with rare disorders without liability. Signed into law by Governor Hickenlooper on April 2, 2018, Senate Bill 18-082 allows physicians to disclose their continuing practice and new professional contact information to any patient with a rare disorder to whom the physician was providing consultation or treatment before termination of their relationship with the organization.

Physician Non-competes Only Allow Damages

Under Colorado Revised Statute 8-2-113, non-compete provisions in an employment, partnership, or corporate agreement with a physician that restrict the physician’s right to practice medicine when the agreement terminates is void and unenforceable. However, the law does permit such an agreement to require the physician to pay damages in an amount that is reasonably related to the injury suffered because of competition. In other words, if a physician in Colorado leaves a group practice or other employer, he or she may practice anywhere but may be compelled to pay damages if he or she practices within an area that is directly competitive with his or her former employer.

New Provision Creates Exception to Damages Remedy

Under the newly passed amendment, physicians and their new employers are shielded from damages for providing information and care to patients with a rare disorder, as defined in accordance with the criteria developed by the National Organization For Rare Disorders, Inc., or any successor organization. Specifically, a non-compete agreement cannot prohibit physicians from disclosing their continuing practice of medicine and new professional contact information to any patient with a rare disorder. Similarly, physicians may continue to provide care to such patients.

Next Steps for Healthcare Employers

Hospitals, physician groups, and other healthcare employers should consider the extent to which this new exception to non-compete damages will apply to the doctors in their group. It is possible that very prominent, renown physicians who may cause the hospital or group to suffer the most in monetary damages when they leave the group will be the same physicians who treat multiple patients for rare disorders. But because the new exception applies only to those patients with rare disorders, the physician may still be held liable for damages for continuing treatment of patients without rare disorders. If in doubt about how to structure and enforce these types of non-compete agreements with physicians, please consult with experienced counsel.

April 9, 2018

Idaho Legislature Repeals 2016 Changes to Non-Compete Law

Nicole Snyder

by Nicole Snyder and A. Dean Bennett

When a new business comes to town, when an existing business seeks to expand, or when a startup is making its way off the ground, it may want (or need) to recruit key employees from existing companies. That can be especially true in the technology field where experienced developers, analysts, and executives are hard to come by.

In 2016, the Idaho legislature made it more difficult for key employees and independent contractors across all industries to change jobs when they were covered by a post-employment non-compete agreement. Recently, the Idaho legislature repealed that 2016 provision in a move seen as correcting an imbalance in the playing field between employers and their key employees when it comes to non-compete restrictions.

A. Dean Bennett

2016 Non-Compete Presumption Burdened Key Employees

When enacted in 2016, the recently repealed non-compete law was touted as business-friendly, as it strengthened an employer’s ability to enforce a non-compete agreement with its key employees. The 2016 law provided that if a court found a key employee or key independent contractor breached a non-compete agreement, the employee or independent contractor then had the burden of overcoming a presumption that their breach of the non-compete caused irreparable harm to the employer. Essentially, the employee was forced to prove a negative, namely that he or she could not adversely affect the employer’s legitimate business interests.

However, the perceived effect of the 2016 non-compete law was that it made it tougher for key employees and independent contractors to change jobs, seek more responsibility or pay at another company, or even start up their own business. Idaho’s non-compete laws have received national attention at the same time Idaho is recognized as the fastest growing state with the fastest growing pay rate.

Repeal Restores Pre-2016 Standard of Proof For Non-Competes

Senate Bill 1287 strikes the language added in 2016 that shifted the burden to key employees and independent contractors to prove that they have no ability to adversely affect the employer’s legitimate business interests as a result of their competitive employment. Consequently, when a breach of a non-compete is litigated in court, the burden will be back on the employer to prove its former employee’s competitive actions harmed the employer’s legitimate business interests.

Governor Otter allowed this repeal bill to become law without his signature. He wrote, “There is no consensus within the business community, or even within the community of technology-driven businesses, for this second change within two years to Idaho Code regarding non-compete agreements between employers and key employees or key independent contractors.” The governor further wrote that the issue can vary depending on the nature of each company’s business plan and whether management considers a “dynamic” workforce, with regular turnover, a positive or detrimental aspect of their business. The governor suggested that he saw little risk in removing the 2016 language as it had not yet been tested in Idaho courts. He also urged the Idaho legislature to take up the issue again in 2019, suggesting that perhaps the creation of a different less onerous standard on employees may be a good middle ground.

Effect on Idaho Employers

Whether you think this repeal is a good or bad development may rest largely on whether you seek to retain your key employees and contractors by limiting their mobility through non-compete agreements, or whether you need to expand and recruit talent within your industry without your recruits being subject to post-employment restrictions. Regardless of what side of that debate you are on, the repeal of the 2016 rebuttable presumption means that Idaho employers seeking to enforce a non-compete in court will need to show that the employee or contractor harmed its legitimate business interests when leaving to work for a competitor in violation of a restrictive covenant. Consequently, this is a good time to revisit your non-compete agreements, giving thought to what business assets and interests you are seeking to protect. In addition, be sure to review the geographic, time, and scope limitations of your non-compete restrictions as only reasonable provisions will be enforceable. As always, check with your attorney to resolve any questions.