Introduction
On April 23, 2024, the Federal Trade Commission (“FTC”) voted to finalize a rule that prohibits employers from enforcing non-compete agreements against workers (“The Rule”). The Rule takes effect 120 days from its publication in the Federal Register. Pursuant to the Rule, a non-compete clause means “a term or condition of employment that prohibits a worker from, penalizes a worker, or functions to prevent a work” from “seeking or accepting work” or “operating a business” following the worker’s conclusion of employment. This is a very expansive definition that is somewhat vague and ambiguous, thereby likely creating confusion as to the types of agreements covered by the Rule. This piece examines the potential impact of the Rule on other types of contractual restrictions, specifically, non-solicitation agreements; non-disclosure agreements; forfeiture for competition agreements; training repayment agreement provisions; and garden leave agreements.
Non-Solicitation Agreements
There are generally two types of non-solicitation provisions: (1) non-solicitation of customers and (2) non-solicitation of employees. This piece focuses on the non-solicitation of customers, which is most likely to be impacted by the Rule. In general, a customer non-solicitation provision prohibits the separated worker from soliciting or contacting the employer’s customers following the worker’s separation from the employer. This is an important tool for employers to protect their customer relationships, which are legally cognizable business interests under New Jersey and New York law.
The Rule on its face does not expressly prohibit non-solicitation provisions. However, they could be covered under the Rule if they are overly broad and “function to prevent” a worker from competing. Indeed, the FTC has stated that non-solicitation agreements are generally not non-compete clauses under the Rule because they do not, by their terms or their effect, prevent a worker from seeking or accepting other work or starting a business but that non-solicitation agreements may satisfy the definition of non-compete clause where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends. Therefore, whether a non-solicitation agreement meets the non-compete definition under the Rule is very fact specific and will depend on the specific language in the provision at issue.
Non-Disclosure Agreements
In general, a non-disclosure agreement (“NDA”) prohibits the worker from disclosing or utilizing an employer’s confidential and proprietary information and/or trade secrets. This usually includes pricing information, marketing strategy, formulas, and other information that is not in the public domain. Even though there are statutory and common law protection for a business’s confidential and proprietary information and trade secrets, NDAs provide important legal protection for businesses and are generally enforceable under New Jersey and New York law.
However, NDAs will likely be impacted by the Rule. The FTC has stated that NDAs may be non-competes under the “functions to prevent” component of the non-compete definition if they span such a large scope of information that they “function to prevent” workers from seeking or accepting other work or starting a business after they leave their job.
Forfeiture for Competition Agreements
In general, a forfeiture for competition provision is a clause that conditions the payment of certain post-employment benefits (such as stock incentives, deferred compensation, or retirement benefits) on an employee’s agreement to abide by post-employment restrictive covenants. The FTC has instructed that forfeiture for competition agreements will likely be impacted by this Rule. In the supplementary information accompanying the Rule, the FTC confirms that a forfeiture for competition provision is an example of a clause that would “penalize” a worker from competing, thus, making it a “defacto” non-competition provision.
Training Repayment Agreement Provisions
A training repayment agreement provision is an agreement in which the employer agrees to pay the costs for an employee’s work-related training if the employee stays with the employer for a designated period of time. If the employee leaves before the designated time, then the employee is responsible for repaying for the costs of the training.
The FTC has provided guidance on whether training repayment agreement provisions will be impacted by the Rule. In the FTC supplementary information accompanying the Rule, the FTC states that a training repayment agreement provision may be a “functional non-compete” if it puts a worker in a position where they are faced with “significant out of pocket costs” if they leave employment that are disproportionate to the training they received while employed.
Garden Leave Provisions
Garden leave is essentially a type of notice of termination provision. Instead of employees actively working during their notice period, they are placed on garden leave and typically relieved of their job responsibilities and duties, but remain employed and cannot work for a competitor. Unlike other provisions examined here, the FTC has instructed that garden leave provisions will likely not be impacted by the Rule. In doing so, the FTC draws a distinction between competition while employed and competition after employment. In its supplementary information, the FTC essentially states that, if the worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis while being asked not to compete, the clause would not fall under the Rule because such an agreement is not a post-employment restriction.
Takeaways
While the Rule is already the subject of litigation and not yet in effect, businesses and individuals nonetheless need to plan as if the Rule will be in effect within the above-noted 120-day period. As such, it is important to understand that the impact of the Rule is not limited strictly to non-compete agreements. Both employers and individuals subject to any contractual restrictions should examine their existing agreements with counsel to determine whether they contain provisions that may fall under the expansive definition of “non-compete” clause under the Rule. And, lastly, if necessary, employers should consult with counsel to revise or redraft the agreements at issue to comply with the Rule.
