FTC’s landmark rule prohibiting noncompetes set for September amid lawsuits

In a landmark decision on April 23, the Federal Trade Commission banned the use of noncompete clauses in employment agreements, set to take effect Sept. 4.

As expected, lawsuits challenging the decision have been filed seeking to invalidate it.

So what is a noncompete? In a nutshell, it is a written contract provision or a company policy that prohibits, prevents or penalizes a worker from/for seeking or accepting employment with a competitor or starting a competitive business after his or her employment ends. Notably, the FTC’s definition of a worker is not limited to an employee but is instead broad so as to include independent contractors, interns, volunteers and other types of workers, even former workers.

The FTC’s decision prohibits businesses from: including noncompete clauses in its contracts and policies; enforcing a noncompete clause after a worker leaves the company; and representing that a worker is subject to a noncompete clause.

If the FTC’s decision withstands the legal challenges, it will invalidate and void all noncompete clauses currently in place and ban businesses from including noncompetes in future contracts and policies. There are, of course, some exceptions, which include, but are not limited to, noncompete clauses with “senior executive” workers, noncompete clauses in a sale of business transaction, and already pending court actions. Also, certain industries — those not subject to the FTC’s jurisdiction — are likely exempt from this decision.

Businesses should begin their implementation preparations by: determining whether they are in an industry over which the FTC has jurisdiction (meaning, where the noncompete ban would apply); monitoring the pending litigation; performing an internal audit of the business’ current and former employees, independent contractors, volunteers, and other covered workers who are subject to a noncompete clause; and working with an attorney to issue the FTC’s required written notice to all affected workers.

If you are a worker, you are probably thinking: “This is great!” But if you are a business owner, you’re probably wondering: “What are alternatives or workarounds?”

These may include trade secret laws, nondisclosure agreements designed to protect confidential and other sensitive information, and/or garden leave agreements. You should consult with your attorneys to see if these options, or others, are available under your state and local rules.

• Madeline Kelleher is an employment law attorney and Michael Lee is the litigation co-chair at Kelleher + Holland, LLC Attorneys at Law, a national recognized, full-service law firm with 60+ legal professionals headquartered in North Barrington. They can be reached at mkelleher@kelleherholland.com and mlee@kelleherholland.com.