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May 13, 2024 Politics & Policy

With legal battle ahead, CT employers urged to use caution following FTC’s noncompete-agreements ban

PHOTO | Adobestock The Federal Trade Commission’s decision to ban noncompete agreements has created uncertainty for Connecticut employers.
By Skyler Frazer

With the Federal Trade Commission’s (FTC) recent ruling to ban most forms of noncompete agreements between employers and workers, employment lawyers say Connecticut businesses should be cautious about using such clauses in existing contracts, even if legal challenges to the decision are coming.

The FTC in April voted 3-2 to ban most U.S. employers from forcing workers to sign noncompete agreements, arguing the move will increase innovation and foster new business formation. FTC Chair Lina M. Khan said noncompete clauses “keep wages low, suppress new ideas, and rob the American economy of dynamism.”

In its ruling, the federal agency estimates 30 million workers — nearly one in five Americans — are subject to a noncompete clause, which typically adds contractual conditions that restrict workers from taking a new job at a competitor or starting a new business if they leave an employer, according to the FTC.

The trade commission said banning noncompetes will lead to a 2.7% annual increase in new business formation, $524 annual pay bump for the average worker and more patents issued each year to entrepreneurs.

Critics, though, said the decision amounts to federal overreach. The U.S. Chamber of Commerce has already filed a lawsuit in Texas over what it called an “unlawful” ban, and Connecticut Business & Industry Association President and CEO Chris DiPentima said the FTC decision sets a “dangerous precedent” that could harm employers, workers and the country’s economy.

Regardless of the upcoming legal challenge, employment lawyers said Connecticut business owners should take the opportunity to assess how and when they use noncompetes, and whether they’re necessary or even valid.

Salvatore G. Gangemi

“Don’t panic and bring out the paper shredder, but give some serious thought to whether or not your noncompetes are reasonable,” said Salvatore G. Gangemi, a partner at law firm Murtha Cullina LLP and a veteran labor and employment attorney. “Some of the noncompetes that these companies are using are 20 years old or even older, so they haven’t given it much thought. Times have changed and courts are less inclined to enforce them than before.”

Will ban ‘ever take effect’?

Under the FTC’s decision, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date, which is at least four months away. Existing noncompetes for senior executives, identified as employees in policymaking positions with annual salaries above $154,161, can remain in force, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives, the FTC said.

Employers will be required to notify non-senior executives that existing noncompetes will not be enforced, the FTC said.

Daniel A. Schwartz

But the chamber’s lawsuit in Texas federal court will likely delay implementation of the FTC’s ban, said Daniel A. Schwartz, a partner and employment lawyer at law firm Shipman & Goodwin LLP.

“That jurisdiction has shown a propensity for issuing nationwide injunctions against Biden administration rulings, so it seems likely that the court (in Texas) will issue an injunction to allow the parties more time to debate the rule without it going into effect,” Schwartz said. “I’ve been telling employers be cautious, be mindful, but don’t assume that this rule is actually going to go into effect in four months. We’re still a long way from that.”

Schwartz said the main argument by the ruling’s critics is that the FTC is overstepping its jurisdiction and “making law instead of interpreting the law.” Some believe these decisions should be left up to Congress, Schwartz said.

The FTC’s argument, Schwartz added, is that noncompetes inherently impede trade and the movement of workers, and are often abused by employers to protect their own business.

He used an example from several years ago when restaurant chain Jimmy John’s included noncompete clauses in contracts with its sandwich makers, which the company later rolled back after critics called it an overstep of such agreements.

“I think that’s the battle that’s going to be fought out in the courts, and I think it’s going to take some time to do so because we really haven’t seen (the FTC) get that involved on noncompetes before,” Schwartz said.

While the ruling is new, the FTC has been exploring changes to noncompete clauses for several years, and it was “just a matter of time” before a formal ruling came out, Schwartz said. Noncompetes have become more common over the last 20 years, he added.

Gangemi, the Murtha Cullina employment lawyer, said he thinks the FTC’s ruling will lose a court battle.

“I don’t think the rule will ever take effect,” he said. “I don’t believe the Federal Trade Commission has the authority to basically ban all noncompete arrangements. I think in this case, they went too far.”

Employers should be ready

While the legal battle over the FTC’s ruling is underway, Schwartz said employers should survey their current use of noncompetes and “figure out what’s at risk if this rule does go into place.”

And employers can still use “restrictive covenants” in other ways, Schwartz said, including provisions that prevent employees who leave a company from soliciting business from their former customers or work colleagues.

“You could also have provisions that say you can’t use confidential or trade secret information from us at a new employer,” Schwartz said. “So, there are some protections that will remain in place, but noncompetes have been used to protect a larger interest than just that.”

Even though he predicts the federal ruling won’t stand, Gangemi said employers should make sure they can articulate what specifically they’re looking to protect via a noncompete clause, to ensure it’s a valid use.

Gangemi said the FTC’s ruling could also be impacted by November’s election: the agency’s five-member voting board has a Democratic-appointed majority, but if the White House flips, so could the FTC.

Regardless, though, Schwartz said employers must be aware that there have been increased efforts nationwide to ban noncompete agreements.

Connecticut legislators in the General Assembly made some headway last year by passing a law that restricts the use of noncompete agreements involving physician assistants and advanced practice registered nurses.

And earlier this year, the Labor and Public Employees Committee endorsed a separate bill that set additional limits on noncompete agreements used by all employers. That bill didn’t gain full approval by the legislature.

Even still, it’s a recent example of states, particularly with Democratic majority legislatures, pursuing their own noncompete bans or restrictions, Schwartz said.

“California has had a ban for a century, so it’s not as though this is a new concept,” Schwartz said. “But I think noncompetes, certainly here in Connecticut, have always been viewed as one of the last protections that employers have as some of the other laws have shifted to make sure employees are treated fairly. So, I think employers just need to be mindful that they’re going to need to use restrictive covenants in a narrower way than perhaps they have done in the past.”

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