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Fight over noncompete ban gives employers breathing room


The pause on the implementation of the Federal Trade Commission’s rule banning future use of noncompete agreements for certain employees gives companies time to reassess post-employment restrictive covenants, experts say. 

Lawsuits filed by the U.S. Chamber of Commerce and tax service firm Ryan LLC in federal courts in Texas shortly after the rule was unveiled last month seek to block it from going into effect and accuse the agency of overstepping its authority. Many experts believe the legal challenges to the rule could reach the U.S. Supreme Court and that the justices will vacate it.  

Philadelphia-based Leigh Ann Buziak, a labor and employment partner at Blank Rome LLP, gives the rule a “slim” chance of surviving should it reach the nation’s high court. 

“It’s overreaching to believe that a federal administrative body can displace the laws of 50 states,” she said. 

Washington-based employment law attorney Tom Spiggle said it is reasonable to believe that the rule will never take effect and that the U.S. Supreme Court will find that the FTC was overreaching.  

The possible ban on noncompete agreements has so far had little impact on the insurance industry.  

Executives at Willis Towers Watson PLC said during an April 25 analyst call to discuss the brokerage’s first-quarter results that the rule presents a “manageable situation” because it uses nonsolicitation agreements, which are distinguishable from noncompete agreements. 

Arthur J. Gallagher & Co.’s top executive expressed a similar view.

Noncompetes prevent an employee from working for a competitor in a specified geographical area for a prescribed time, said New York-based employment litigator Nicholas Reiter, a partner at Venable LLP who represents companies. On the other hand, nonsolicitation agreements prohibit former employees from doing business with the company’s clients. 

“A noncompete doesn't care about which customers are in play. Noncompetes are about not going to work for a competitor, whereas a nonsolicitation covenant allows an employee to go work for a competitor, so long as the employee is not calling upon the former employer’s customers and/or doing anything that would cause a diminution of the business relationship between the former employer’s customers and the former employer,” he said. 

Noncompete agreements are intended to protect a company’s trade secrets and proprietary information, cultivation of customer goodwill, and investment in employee training, he said.  

“The rule essentially says that all noncompetes are overly broad just by restraining any competition. My take on the rule is that the FTC is saying a company’s legitimate interests in using a noncompete agreement aren't legitimate enough, as compared to employees’ interest in seeking new employment with a competitor,” Mr. Reiter said.

The FTC’s rule does allow the continued use of noncompete agreements for “senior executives,” which are classified as employees making more than $151,164, and who are in a “policy-making position.” 

There is the potential for litigation over whether an employee qualifies as a senior executive, Mr. Reiter said. 

If the FTC’s rule goes into effect, nonsolicitation covenants can remain so long as they aren't so overly broad that they act as de facto noncompete agreements, he said. 

The trend against the use of noncompete agreements dates to 2017 when a McDonald’s Corp. worker filed a class action that accused the fast-food chain of encouraging franchisees to use noncompete agreements to prevent employees from going to work at other restaurants. 

Four states — California, Minnesota, North Dakota and Oklahoma — have banned noncompete agreements, while 25 states have some restrictions on the covenants. Nine states have restrictions on noncompetes based on an employee’s income, and 12 states have no restrictions. 

California also has a law that limits the use of nonsolicitation agreements. 

Regardless of whether the FTC’s rule is implemented, it will influence how companies and employees view post-employment restrictive covenants, Ms. Buziak said. 

Kimberly Carson, an employment litigation partner at Quinn Emanuel Urquhart & Sullivan LLP who represents companies and employees, said organizations “should prepare for the worst” and be ready if it should go into effect, even though compliance is not currently required.