On July 9, 2021, President Biden signed Executive Decree 14306. The OE made headlines warning that non-compete agreements as we know them are doomed to failure. These forecasts are premature. The EO itself does not affect non-competition employment agreements, but simply recommends that the Federal Trade Commission begin the rulemaking process with the principles of the EO in mind. .
Section 5 (g) states that âTo address agreements that may unduly limit the ability of workers to change jobs, the FTC Chairman is encouraged to consider working with the rest of the Commission to exercise regulatory power. of the FTC under the Federal Trade Commission. Take action to limit the unfair use of non-competition clauses and other clauses or agreements that may unfairly limit the mobility of workers.
The general tenor of the EO is that the consolidation of large companies unfairly restricts competition. To date, the enforceability of non-compete clauses has been almost entirely governed by state law, and state laws vary widely on this subject. For example, California law is quite hostile to these provisions, while laws in Missouri, Illinois, and Kansas are more common, allowing restrictions that are adequately limited in scope and duration. While we have no idea what the FTC’s proposed settlement will look like, we can start guessing by looking at state laws on non-compete agreements in general.
In Missouri, non-compete agreements are enforceable as long as they protect a legitimate business interest, such as confidential information, trade secrets, and customer contacts, and are reasonable in scope in time and geography. It is important to note that customer contacts can only be protected for employees who actually interact with customers and can influence customer decisions. Whelan Security Co. v. Kennebrew, 379 SW3d 835 (Mo. bench 2012). A related restrictive covenant, the non-solicitation clause, which prevents employees from ripping off their former colleagues, is presumed enforceable for up to a year, when its purpose is to protect the loyalty of the company, the goodwill of the customers. and related interests. To see Mo. Rev. Stat. Â§ 431.202. For more information on Missouri non-competitions, see our blog posts Missouri non-compete agreements: Missouri Supreme Court (again) explains it all from December 2012 and Sometimes you just can’t compete from April 2020.
Illinois common law generally resembles Missouri with respect to non-competition. However, in Illinois, non-competition with “low-wage employees,” an employee who earns the higher of the federal, state, or local minimum wage or $ 13.00 an hour, is expressly prohibited by the Law. law. âIllinois Freedom to Work Act,â 820 ILCS 90/5.
The landscape of Kansas is also similar to that of Missouri. In Idbeis v. Wichita Specialist in Surgery, PA, 112 P.3d 81, 279 Kan. 755 (2005), the Kansas Supreme Court established guidelines for enforcement that non-compete drafters should take note of. In a relevant part, the Court has ruled that non-competition is enforceable if it is not aimed at avoiding ordinary competition, does not create an undue burden on employees and does not harm the public welfare.
What about e-commerce?
In the Internet age, geographic restrictions on non-compete sometimes seem irrelevant. A company headquartered in Kansas City, Missouri may have a sales representative located in Juneau, Alaska who sells products to customers in Key West, Florida. A geographic ban within a radius of 50 miles does not make sense. Can a company not simply prohibit its employees from going to work for a competitor?
These types of non-compete agreements, where a company identifies competitors and seeks to prohibit employees from changing shifts, are likely to be an area of ââfocus in FTC regulations. Particularly in the post-pandemic world of Big Tech, where remote working is becoming the norm, companies may seek to protect their employees from Silicon Valley raids with global non-competition. The tension is evident: How will the FTC limit the monopoly raid behavior of the world’s Google and Facebook and protect the freedom of movement of employees?
Employers and practitioners would do well to consider Sigma-Aldrich v. VIkin, 451 SW3d 767 (Mo. App. ED 2014). In that case, the Court declared invalid a blanket non-competition which would have prohibited an employee from
“Engage in, provide services or advice, contribute my knowledge or invest in any business engaged in any work or activity involving a product, process, service or development which then competes with, the same or similar to a product, process, service or development on which I worked or for which I had access to confidential information while I was with the Company wherever the Company markets or sells such a product or service.
The Court ruled that this general prohibition was intended to protect against fair competition. To know more Sigma-Aldrich, see our blog article Court of Appeal upholds dismissal of Sigma-Aldrich’s injunction request against former employee. The Court asked employers to assess the specific duties of the employee, the use of trade secrets in their work, then identify the protectable interest at stake, then closely tailor the non-competition to the protection. of these interests. As always, a one-size-fits-all approach to non-compete simply doesn’t work.
FTC Regulatory Authority
As a general rule, a properly promulgated agency rule will prevail over conflicting state laws on the same subject. But as an administrative agency, the scope of the rule is strictly limited to the agency’s statutory authority. The FTC can only issue a rule âwhen it has reason to believe that the unfair or deceptive acts or practices that are the subject of the proposed regulation are widespread. [â¦]”, Ie” the information available to the Commission indicates a widespread pattern of unfair or deceptive acts or practices “. 15 USCA Â§15a (b) (1) – (3).
When can we expect this new rule to come into effect? Section 18 (a) of the Federal Trade Commission Act includes rulemaking procedures that go beyond those of the Administrative Procedures Act. The FTC is required to publish an advance notice of a regulatory proposal in the Federal Register containing information about the purpose of the rule and invite interested parties to comment. The FTC must also seek advice from certain House and Senate committees. Then, at least 30 days later, the FTC can issue a regulatory proposal notice.
Binding force of current non-competition after FTC regulation
The logic of the OE is somewhat circular, given the restrictive covenant laws of Kansas, Missouri, and Illinois. By law, the FTC only has the power to regulate when there is widespread injustice. Restrictive covenants are only enforceable to the extent that they are reasonable and protect the legitimate interest of an employer in protecting itself from harm. unfair competetion. So in theory, a non-compete that is enforceable under Missouri, Illinois, or Kansas law should also be enforceable under FTC regulations.
Protect your business interests
There is no reason for the IB to scare companies into abandoning non-compete agreements. However, the EO is an important reminder that the time has come for employers to reassess their non-compete agreements. Are they targeted at a protectable interest, such as customer contacts, trade secrets and goodwill? It is important to note that the EO does not deal with trade secrets, and Missouri, Illinois, and Kansas have already enacted the Uniform Trade Secrets Act. Employers whose businesses depend on trade secrets and proprietary information should consider a trade secrets agreement separate from their non-compete agreement.
Ultimately, we won’t know what the FTC is seeking to regulate until its proposed rule is released.