A federal government agency has announced a future ban on the use of “non-compete agreements.” If it survives court challenges, the ban may have significant effects on insurance agencies’ relationships with their employees and potential buyers.
On April 23, 2024, the Federal Trade Commission (FTC) announced that it had adopted a regulation that declared the use and enforcement of “non-compete clauses” to be an “unfair method of competition.” The rule defines non-compete clauses as employment terms or conditions that:
● Prohibit workers from,
● Penalize workers, or
● Stop them
from accepting jobs from other employers or running a business after leaving the current job. The 1914 law that created the FTC authorized it to prevent the use of unfair methods of competition in commerce.
The rule prohibits the enforcement of any non-compete clauses entered into with most workers, including employees, independent contractors, interns, volunteers, apprentices, and sole proprietors providing services to businesses. There is a small exception for “senior executives,” defined as those:
● In positions where they have “final authority to make policy decisions that control significant aspects of a business entity” and
● Whose total annual compensation is at least $151,164.
Non-compete agreements in force with senior executives before the rule’s effective date will still be enforceable; those entered into after the effective date will not be. The rule will take effect 120 days after its publication in the Federal Register, the official publication of federal government regulations. As of May 6, it had not yet been published.
In addition, the rule requires employers with non-compete agreements in place to give “clear and conspicuous notice” to the affected workers that those agreements are unenforceable. The regulation provides model language for employers to adopt for the written notices.
Non-compete agreements will still be permitted if they are entered into pursuant to a bona fide sale of:
● A business entity,
● The person’s ownership interest in a business entity, or
● All or substantially all of a business entity’s operating assets.
Dirk Beamer of the law firm of Wright Beamer, PLC in Michigan says “the world has changed” when it comes to contracts with producers. “You cannot hire a producer and have them sign a non-competition agreement that is as broad as would have been considered legal before this rule was announced,” he says.
Agencies still have ways to protect themselves. Many agencies employ non-solicitation agreements, also known as non-piracy agreements. These are agreements where the employee promises not to solicit the agency’s clients for some period of time after leaving the agency.
Beamer says the new FTC rule does not interfere with these types of agreements or non-disclosure agreements. “By its terms,” he says, “it explicitly states that non-solicitation agreements and non-disclosure agreements are enforceable so long as they are not so broadly written as to effectively preclude all competition.” For example, an agreement prohibiting a producer from soliciting former clients for some period of time after he leaves the agency would be enforceable. An agreement prohibiting him from working with former clients that contact him on their own would not be.
An agreement that does not make a clear distinction between non-competition and non-solicitation, Beamer says, runs the risk of being thrown out in its entirety by the courts. He recommends careful crafting of non-solicitation and non-disclosure agreements to avoid that kind of result.
While non-compete agreements between sellers and buyers of an agency are still enforceable, Beamer thinks the context might not always be clear. The question becomes, he says, whether a non-compete agreement was in the context of the business sale or the context of the seller as an employee of the buyer. It will be very important to make a clear distinction in purchase contracts.
The rule’s future is far from settled. The U.S. Chamber of Commerce and other groups have announced lawsuits to block it. Beamer believes the court will at the least issue a temporary injunction that will prevent the FTC from enforcing it while litigation is ongoing. In addition, the rule will face challenges. “My question as a judge would be, if the (FTC) Act made it unlawful, why have we been allowing them and enforcing them for many decades?” Beamer asks.
Still, he cautions employers against waiting until the last minute to send the required notices to workers. If a court has not issued an injunction or overturned the rule a month or so before the effective date, they should prepare to send the notices.
It is likely that this rule will be tied up in court for some time. However, employers who use non-compete agreements should prepare now for a world without them.
