The Good News provides a monthly column with important content having to do with topics from the legal community. This month features a conversation with Paul Lopez, COO, Tripp Scott.

Florida employers, and those of 45 other states and the District of Columbia, have routinely made use of noncompete agreements (noncompetes), non-disclosure agreements (NDAs) and non-solicit agreements (non-solicits) in employee contracts to protect their business interests. These agreements, grouped in Sunshine State statutory law as “restrictive covenants,” have been permitted here with various restraints on time and scope. 

But in April the Federal Trade Commission (FTC), a U.S. government agency, issued a final rule that may turn various industries upside down by severely limiting the applicability of existing noncompete agreements and effectively barring new ones. 

Florida businesses who have included these agreements in employee and executive contracts need to know about this rule and understand how it applies to existing and any planned contracts and what kinds of restrictions can be entered into and enforced going forward.

 

Bill Davell: Why do businesses employ noncompete agreements, and what does current law say?

 

Paul Lopez: Florida law has allowed enforcement of contracts that include noncompete agreements “so long as such contracts are reasonable in time, area and line of business.” The statute reinforces why employers have found such contractual arrangements useful by listing enforceable “legitimate business interests” for noncompetes:

• “Trade secrets
• “Valuable confidential business or professional information
• “Substantial relationships with specific prospective or existing customers, patients, or clients
• “Customer, patient, or client goodwill …
• “Extraordinary or specialized training.”

The statute goes on to define time limits on noncompetes that will generally be presumed “reasonable” (under six months) and “unreasonable” (more than two years), as well as presumptively reasonable restrictions under various circumstances such as dealers or franchisees or the sale of a business. 

 

BD: Why is the FTC taking a stance against noncompetes?

 

PL: In pursuing and ultimately issuing the rule, the FTC has maintained that noncompete agreements “hurt workers” and “harm competition.” Chair Linda Khan argues, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism.”

The agency claims that the rule would generate 8,500 additional new businesses each year, $524 annually in additional earnings for the average worker, and an increase of 17,000-29,000 new patents a year for the next decade.

 

BD: How does the new FTC rule restrict noncompete agreements?

 

PL: The final rule includes the following provisions, with an effective date of September 4— 120 days after its official publication:

• a comprehensive ban on new noncompetes with all workers 
• separate provisions on existing agreements for two subcategories of workers:
  • senior executives – defined in FTC’s accompanying release as “workers earning more than $151,164 annually and who are in policy-making positions” – may be required to comply with existing noncompetes that were executed prior to the effective date.
  • all other existing noncompetes not involving senior executives will no longer be enforceable after the effective date.
• a requirement to notify workers that firms will not enforce noncompetes against them in the future, along with model language for these communications.

The rule does not apply to:

• noncompetes entered into pursuant to a bona fide sale of a business,
• NDAs or non-solicit agreements, unless those agreements are so broad that they have the same functional effect as a noncompete,
• “garden leave” provisions in which an employee technically remains on the payroll with the same total annual compensation or pro rata “severance” pay,
• banks, savings and loan institutions, and credit unions, over which the FTC does not have jurisdiction.

 

BD: What should my business do now when it comes to noncompetes, non-solicits and NDAs?

 

PL: A private employer and a coalition of business groups have filed suit to block the rule, but no action has been taken, and Florida employers should not assume that these efforts should be successful.

Rather, employers who require restrictive covenants to protect legitimate business interests should begin the process of assessing their workforces to determine which employees qualify as senior executives, against whom existing noncompetes can still be enforced, and which should be required to enter into NDAs and non-solicits as alternative approaches.

However, those agreements need to be carefully prepared so that they are not construed as unenforceable noncompetes under the new FTC rule.

 

Tripp Scott’s Labor & Employment attorneys, who continue to track developments with the new rule closely and offer deep experience in crafting employment contracts, stand ready to help South Florida and multistate businesses in understanding the new rule and preparing compliant employee and executive contracts that protect their interests. 

Contact us at 954-525-7500 or www.trippscott.com.

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Read more Ask Bill at: https://www.goodnewsfl.org/author/william-c-davell/