Page 42 - Investment Advisor June 2023

COmPlIAnCe COACH

By Thomas D. Giachetti

Could non-Compete Agreements Be Finished?

A proposed rule may require employers to rescind most existing clauses.

he Federal Trade Commission into a series of rules which allow their
(FTC) is proposing a set of rules employees to almost move from one firm
Twhich, if passed and deemed freely to another firm, provided both the
constitutional, would severely limit the former and current employer are both
use of non-compete clauses between members and the employee only takes
employers and their employees. The pro- their clients’ names, addresses, phone
posed rule would, among other things, numbers, email addresses, and account
provide that it is an unfair method of title information. The purpose is to min-
competition for an employer to enter imize litigation between member firms.
or attempt to enter into a non-compete The FTC has sought public com-
clause with a worker; to maintain with a ment on several sweeping changes that,
worker a non-compete clause; or, under if enacted and deemed constitutional,
certain circumstances, to represent to a sonableness inquiry when determining would nearly eliminate the use and
worker that the worker is subject to a whether the provision is enforceable. enforceability of restrictive covenants.
non-compete clause. Generally, courts first consider whether The proposed rule would broadly define
I sat down with my partner, Scott the restraint on the former employee the term “non-compete clause” as a con-
Unger, to address this issue. He explained is greater than needed to protect the tractual term between an employer and
that a non-compete clause is a contractu- employer’s legitimate interest. a worker that prevents the worker from
al term between an employer and a work- If the employer can demonstrate a seeking or accepting employment with a
er which typically blocks the worker legitimate interest, then the employ- person or operating a business after the
from working for a competing employer er must show that the non-compete conclusion of the worker’s employment
or starting a competing business within clause is narrowly tailored to achieve with the employer.
a certain geographical area and period that purpose. In doing so, courts con- Further, the proposed rule would
after the worker’s employment ends. sider whether the geographical and time require employers to rescind almost all
Currently, there is no federal legisla- scope provided for in the restrictive existing non-compete clauses no later
tion governing the use and enforcement covenant is reasonable. Some states, like than the rule’s compliance date and tell
of restrictive covenants. Rather, their Pennsylvania, require that the employer their employees that they are no longer
enforceability depends on the applica- provide some form of consideration in subject to the restrictive covenant.
tion of state law. All 50 states current- exchange for the restrictive covenant. The FTC’s purported power comes
ly restrict or curtail their use to some Current law in the states where from Section 5 of the Federal Trade
degree. Three states — California, North restrictive covenants are enforceable Commission Act. It is uncertain whether
Dakota and Oklahoma — have adopted requires a deeper analysis, weighing the the federal courts would broadly inter-
statutes rendering non-compete clauses employer’s right to protect its investment pret the FTC’s power to supersede state
void for nearly all workers. in their business and employees versus laws on the subject.
Among the remaining 47 states where the employee’s right and need to support Assuming the legislation is adopt-
non-compete clauses may be enforced themselves. In other words, restrictive ed and is deemed to be constitutional,
under certain circumstances, eleven covenants are not enforced haphazardly Unger advises that employers should
states and the District of Columbia have or without these important consider- consider the use of narrowly tailored
enacted statutes making non-compete ations. In addition, some industries have non-disclosure, confidentiality and “gar-
clauses void or unenforceable — or have created option-in industry agreements, den leave” agreements to protect their
banned employers from entering non- such as the financial industry’s Broker legitimate business interests.
compete clauses — depending on the Protocol, which limits the applicability
worker’s earnings or other similar factors. of non-competition agreements. Thomas D. Giachetti is chairman of the
In the states where restrictive cov- The Broker Protocol is a voluntary Investment Management and Securities Adobe Stock
enants are legal, courts employ a rea- program where employers may opt Practice of Stark & Stark.

40 Investment AdvIsor June 2023 | ThinkAdvisor.com