Q: I have been reading a lot in the news recently about non-competition agreements, some sort of new federal regulation surrounding them, and court decisions about that regulation. What exactly are non-competition agreements, what is this regulation that I keep hearing about, and can I still include non-competition provisions in employment contracts with my key employees?
A: Non-competition provisions are one type of restrictive covenant that can be important for an organization to include in employment contracts with key employees. While they can vary based on the industry and size of the organization, non-competition provisions generally prevent employees from working for or starting a competing business in a specific geographical area for a certain period after leaving the employer. Other types of restrictive covenants that organizations often include in their employment contracts include provisions prohibiting employees from soliciting clients or employees for a specified time after their employment ends (i.e., non-solicitation provisions), and provisions requiring employees to maintain the organization’s confidential and proprietary information, including but not limited to trade secrets, after their employment ends (i.e., non-disclosure agreements).
This issue has been in the news often recently because in April 2024, the Federal Trade Commission (“FTC”) issued a final rule that would ban and render unenforceable most non-competition provisions in employment contracts. Going forward, the FTC’s rule would prohibit employers from entering into any new non-competition agreements as of the effective date, with only a few exceptions (e.g., non-competition provisions in connection with the bona fide sale of a business). Looking backwards, the FTC’s rule would also invalidate existing non-competes with workers—with an exception for senior executives—and require employers to provide written notice to any current or former worker subject to a non-compete informing them that the employer will not enforce that provision after the effective date. The FTC’s non-compete rule immediately drew various legal challenges, and on August 20, 2024, a federal district court in Texas set aside the FTC’s rule nationwide, holding that the agency had exceeded its statutory authority in issuing the rule. The FTC has until October 21, 2024 to appeal the district court’s order.
So, as long as the FTC rule remains invalidated, does this mean that non-competition provisions are still allowed in employment agreements for now? In most states, including New Hampshire, the answer is “yes” non-competition provisions are allowed, subject to compliance with local state law. Having said that, employers should be mindful that generally speaking, such provisions will be upheld only so long as they are no more burdensome than reasonably necessary to protect the organization’s legitimate interest (e.g., protecting client contacts or confidential information), and are not contrary to public policy. With the heightened attention on this issue and lots of variations between different states’ laws in this area, employers would be wise to review their template language for employment contracts and consider how to appropriately tailor a non-competition provision in any individual employee’s specific circumstances.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to knowthelaw@mclane.com. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.