A recent wave of change is sweeping over the employment landscape, as the Freedom to Compete Act of 2023 takes aim at non-compete agreements. We delve into this significant legal development and share a seven-step guide for employers to navigate this new territory.
Current Situation
The FTC non-compete ban delay till April 2024 has stirred employers nationwide. It left them in a waiting game, uncertain about the future of non-compete agreements. This post presents a guide for employers to navigate this period and prepare.
While the Freedom to Compete Act represents a major shift in employment law, it is not yet in effect. It awaits a decision from the Federal Trade Commission, which is currently processing nearly 27,000 public comments on the issue. Employers, therefore, find themselves in a period of watchful waiting. But with thoughtful preparation, they can be ready to adapt to this change.
What is the Freedom to Compete Act of 2023?
The Freedom to Compete Act targets non-compete agreements, defined as contracts that limit an employee’s ability to work for another employer, in a specific geographical area, or in a similar role, after their current employment terminates. Under the Act, all existing non-compete agreements will become void and unenforceable. From the Act’s enactment date, employers cannot establish, extend, or renew any non-compete agreements.
Authority to Pass this Law
The FTC, or the Federal Trade Commission, itself does not pass laws. Instead, it is an administrative agency that enforces laws passed by Congress. It has the authority to create rules and regulations that further the purpose of the laws under its purview, which generally revolve around antitrust and consumer protection matters. The rulemaking process, which involves public comment opportunities, creates these rules and regulations.
However, the FTC does not have the authority to ban non-compete agreements outright. The power to pass such a law lies with Congress, and this is exactly what is happening with the “Freedom To Compete Act.”
Agencies such as the FTC will enforce the new law and create fair rules if this act passes. This balance between legislative and executive functions is typical in the U.S. federal system, where Congress is responsible for law-making, and the executive branch (including agencies like the FTC) is responsible for law enforcement and administrative rulemaking.
Plan For Employers
How does this affect your business? Employers have a full year before the expected rule enforcement. We suggest a plan to manage this transition effectively:
- Inventory all current restrictive covenant agreements. Track all non-competes activated over the next year. This approach aids swift action if the rule finalizes and maintains awareness of active agreements and potential gaps.
- Re-evaluate existing non-compete agreements. Can a less burdensome covenant like a customer non-solicitation or confidentiality provision safeguard your interests?
- Scrutinize your non-solicitation, confidentiality, and non-disclosure clauses. Make sure they withstand potential scrutiny under the new law, protect your legitimate interests, and don’t serve as de facto non-competes.
- Understand the Federal Defend Trade Secrets Act and state trade secret statutes. Consult with legal counsel about deploying these laws, if necessary.
- Fortify trade secret protection. Identify your trade secrets, develop proper protection policies, restrict access, train employees, and implement technological controls.
The Exception
A significant exception in the Act is the allowance for agreements barring employees from sharing trade secrets. This means that while employers might be losing a tool in non-compete agreements, they retain the right to protect confidential information.
Conclusion
In summary, the Freedom to Compete Act might end non-compete agreements. However, businesses are not defenseless. Employers can still protect their interests by strategically using other forms of restrictive covenants and strengthening their trade secrets protection strategies. Stay updated, stay informed, and be prepared to adapt.
The legal process can get difficult, which is why we always recommend that you seek the assistance of counsel; or at least have a consultation. Schedule a consultation with one of our attorneys today to review the issues of your case, the legal options you may have, and certain rights that pertain to your unique situation.
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