The Federal Trade Commission (FTC) just announced, at the time of this writing, its ban on most noncompetition agreements between employers and workers utilized by businesses throughout the U.S. The new FTC Rule, originally proposed in 2023, is set to become effective 120 days after its publication in the Federal Register, which will depend on the outcome of legal challenges opposing the ban.1 The Rule embodies policy goals of the current U.S. President’s administration and mandates how businesses compete. However, companies utilizing non-compete clauses or agreements advocate that these tools are an effective means to protect trade secrets, intellectual property, and other related confidential information. Typically, in the automotive industry context, a non-compete agreement might be used with dealership personnel, such as sales or F&I staff, to protect proprietary customer and sales-related information and processes. Also, in the context of a dealership buy-sell, non-compete clauses or agreements are utilized to protect the investment of the purchasing dealer. In the face of the pending legal challenges to the Rule, some businesses are assuming a wait-and-see posture while they monitor the legal cases and continue their use of non-compete agreements. Other businesses are also evaluating how they might protect their proprietary interests without non-compete agreements or clauses and are preparing for inevitable effective date and enforceability once the legal wrangling ceases. It’s important for businesses to understand the ban now in the event it goes into effect in the near term. First, as mentioned above, the Rule becomes effective 120 days after publication in the Federal Register which may be delayed depending on the pending lawsuits. The Rule prohibits new non-compete clauses and agreements with all workers, which includes senior executives and also includes independent contractors, volunteers, interns and all persons who work for an employer or contractor. After the effective date of the Rule, such a non-compete clause or agreement will be viewed by the FTC as an “unfair method of competition” and prohibited by the Federal Trade Commission Act, thereby subjecting businesses to possible enforcement actions, civil claims and penalties. For non-compete covenants or agreements existing as of the effective date, only those with senior executives (earning greater than $151,164.00 and working in “policymaking positions”) will be grandfathered or permitted to continue. There is also a business sale exemption in the Rule for noncompete agreements that are entered into as part of a bona fide sale of a business. Business consultants, attorneys and other advisors expect additional legal challenges against the Rule to be lodged, BY JULIE CARDOSI, ESQ. LAW OFFICE OF JULIE A. CARDOSI, P.C. Counselor’s Corner Federal Trade Commission to Institute Ban on NonCompete Agreements 10 Illinois Automobile Dealer News
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