On April 23, 2024, the Federal Trade Commission (FTC) voted to finalize a rule that would prohibit employers from enforcing non-compete agreements against workers (The FTC Rule). The FTC Rule, which was scheduled to go into effect on Sept. 4, 2024, defined a non-compete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker, or functions to prevent a worker” from “seeking or accepting work” or “operating a business” following the worker’s conclusion of employment.

In the ensuing months, businesses were scrambling on how to handle this very expansive and aggressive definition that was somewhat vague and ambiguous and created confusion about the types of agreements that would be covered by the FTC Rule.

However, given the question of whether the FTC had the legal authority to promulgate such a rule, the FTC Rule was the subject of multiple lawsuits, including in federal court in Texas.

Subsequently, on Aug. 20, 2024 (just weeks before the FTC Rule would go into effect), in the long awaited decision of Ryan, LLC v. Federal Trade Commission, (Civil Action No. 3:24-CV-00986-E, N.D. Tex.), Judge Ana E. Brown set aside the FTC Rule, stating that it “shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” In so holding, Judge Brown stated: “In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action.”

This decision was a huge sigh of relief for businesses, which avoided having to notify employees that the non-compete provisions to which they previously agreed were unenforceable.However, businesses are not yet out of the woods as an appeal and subsequent legal actions may be forthcoming.Therefore, the viability of non-compete agreements as a measure of protection for employers is now dubious.

So how can businesses protect themselves by way of other types of contractual restrictions—specifically, non-solicitation agreements, non-disclosure agreements, training repayment agreements, and garden leave agreements?

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Non-Solicitation Agreements

Generally, there are two types of non-solicitation provisions: (1) non-solicitation of customers; and (2) non-solicitation of employees. In general, non-solicitation provisions prohibit the separated worker from soliciting or contacting the business’s customers or employees following the employee’s separation. This is an important tool for employers to protect their customer and employee relationships, which are legally cognizable business interests under New York law.
While the FTC Rule is not in effect, the FTC did provide valuable guidance on how businesses may protect themselves with non-solicitation provisions. Indeed, the FTC stated that non-solicitation agreements often do not qualify as non-compete clauses because they do not, by their terms or their effect, prevent a worker from seeking or accepting other work or starting a business.

However, the FTC explained that non-solicitation provisions may be considered de facto non-compete clauses where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends. Therefore, businesses should be mindful of preparing narrowly tailored non-solicitation provisions that do not limit a separated employee’s ability to work or perform services for competing businesses.

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Non-Disclosure Agreements

In general, a non-disclosure agreement (“NDA”) prohibits the worker from disclosing or utilizing an employer’s confidential and proprietary information and/or trade secrets. This usually includes pricing information, marketing strategy, formulas, customer preferences, and other confidential and proprietary information that is not in the public domain. Even though there are statutory and common law protections for a business’s confidential and proprietary information and trade secrets, NDAs provide added important legal protection for businesses and are generally enforceable under New York law.

The FTC also provided valuable guidance on the drafting of non-disclosure provisions, essentially stating that NDAs may serve as non-competes if they span such a large scope of information that they “function to prevent” workers from seeking or accepting any other work or starting a business after they leave their job. Therefore, it is best practices to avoid overly broad non-disclosure provisions and limit NDAs to protect the employer’s legitimate business interests.

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Training Repayment Agreements

A training repayment agreement is a contract in which the employer agrees to pay the costs for an employee’s work-related training if the employee stays with the employer for a designated period of time. If the employee leaves before the designated time, then the employee is responsible for repaying the employer for the cost of the training. This remains a viable tool for businesses to protect their investment in their employees.However, businesses need to be mindful of imposing significant out-of-pocket costs on their employees that are disproportionate to the training they received while employed—which would potentially convert these agreements into functional non-compete agreements.

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Garden Leave Agreements

Garden eave is essentially a type of notice of termination provision. Instead of employees actively working during their notice period, they are placed on garden leave and typically relieved of their job responsibilities and duties but remain employed and precluded from working for a competitor. The FTC weighed in on garden leave provisions when it published its rule, drawing a distinction between competition while employed and competition after employment.

In its supplementary information, the FTC essentially stated that, if the worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis while being asked not to compete, the provision is not a post-employment restriction. Thus, garden leave provisions remain a viable option for employers to protect their legitimate business interests.

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Takeaways

While the FTC Rule is not currently in effect, the continued viability of non-compete agreements remains in doubt. Therefore, employers need to be creative and adjust accordingly to protect their legitimate business interests.As best practices, businesses should be examining their existing agreements with counsel to determine how to achieve their goals in light of the current legal landscape. This may require the revision or redrafting of existing agreements or, as set forth in this piece, finding viable, alternative contractual alternatives to protect their businesses.

Joshua S. Bauchner is a partner in the Litigation and employment practice groups in Mandelbaum Barrett PC’s New York office. Frank Custode is a partner in the employment practice at the firm’s Roseland, NJ, office.