By Eric D. Morton
On Tuesday, April 23, 2024, the Federal Trade Commission (FTC) announced a sweeping ban on noncompete agreements. This ban will directly affect both new and existing contracts, with the exception of noncompete agreements covering senior executives. Of course, California banned noncompete contracts in 1872 and has strictly enforced that ban since. California’s ban is currently in found in Business and Professions Code Section 16600. (it was originally written in the Civil Code). In California, any contract or terms in a contract that restrict someone’s ability to do work is void ab initio (i.e. void as soon as its signed). This is much stronger than a simple non-compete. I had a client who was sued by her former employer for breaching a confidentiality agreement. We convinced the judge to throw out the confidentiality agreement because it was too restrictive of my client’s ability work.
It’s important to understand the impact of noncompete clauses nationwide. Non-competes have become commonplace, affecting nearly one in five American workers. They have been criticized for imposing limitations that hinder a worker’s ability to move to a new job, block embarkment on business ventures, or force workers to remain within their chosen field to avoid relocation, lower wages, or costly legal battles.
The impact of California’s ban has been enormous. Few people realize that an important reason California has the 5th largest economy in the world (if California were a separate nation) is because of its long standing ban on non-competes. For instance, Business and Professions Code Section 16600 is literally the foundation of Silicon Valley. In the late 1950s, a group of electrical engineers in Palo Alto decided to start their own company. They quit their jobs and started a competing company nearby. Many engineers, coders, software developers, et al. have followed their example and founded hundreds of technology businesses in the Bay Area and beyond. It is obvious that the FTC recognizes this success and wants the rest of the country to emulate it.
Here are the key highlights of the FTC’s decision:
- Immediate Impact: The ban will take effect 120 days after publication in the Federal Register, which could be as soon as mid-August 2024.
- Invalidation of Existing Agreements: Nearly all noncompete agreements with workers will be rendered unenforceable, and employees must be informed of this change.
- Focus on Employee Mobility: The objective of the FTC’s decision is to bolster career flexibility and wage growth opportunities for workers by removing agreements that restrict employment movement.
- Preserving Trade Secrets: While noncompetes are being phased out, confidentiality agreements and existing laws continue to protect trade secrets and proprietary information.
- Anticipated Challenges: Various business interest groups that question the FTC’s authority to establish such a sweeping rule are expected to oppose the decision. The pro-business lobbying group, the U.S. Chamber of Commerce, has already stated that it will sue to block the rule.
Many businesses outside California, or that employ workers outside California, should take steps to prepare for compliance with the FTC ban:
- Review Current Contracts: Examine existing employment contracts to identify clauses that will be affected by the proposed rule.
- Prepare for Compliance: Begin drafting revisions and alternative contractual protections that align with federal guidelines should the proposed rule take effect.
- Stay Informed: Keep abreast of updates, as legal counteractions may alter the final details and enactment timeline.
- Develop a Communication Plan: Prepare to transparently inform affected employees about changes to their employment terms in line with the new regulation.
- Rethink Employee Retention: This impending change necessitates a strategic review of your employee retention policies as the competitive landscape for talent is likely to become more dynamic.
Our firm is closely monitoring the situation and is available to guide you through this transition. We can help ensure that your contracts remain protective of your interests while adhering to the new regulatory environment.
Eric D. Morton is the principal attorney at Clear Sky Law Group, P.C. He can be reached at 760-722-6582, 510-556-0367, and emorton@clearskylaw.com
