The End of the Non Compete Era?
Whenever I talk with my small business clients (business owners, independent contractors, employees) about non-competes, I give them the same speech. In order for a non-compete to be effective or even enforceable, it needs to pass the reasonableness test. First, it must be reasonable in scope (e.g., you can't ban someone from an entire industry, but you can restrict them from a specific business segment, customer space, or other narrowly defined area). Second, the duration must be reasonable (six months to one year is reasonable for an employee, a little longer for an IC, and even longer for a business entity subcontractor). Last, the geographical reach must be reasonable (U.S.-wide bans are a no-go, while restriction within a certain milage radius can make sense). And guess what? If any one of these factors is unreasonable, courts in Virginia will rule the entire non-compete unenforceable. That's right, it won't get revised to make it workable - and the restricted employee/IC is now freer than Andy Dufresne in Shawshank Redemption.
In any case, my days of speech-making on this topic may be coming to an end. This past January, the FTC proferred a rule banning non-competes, and the period for public comment has ended. We now await the final rule, in either its original or public comment-modified form.
And don't take this lightly. Section 910.2(b)(1) of the rule reads, ".....it is an unfair method of competition for an employer to maintain with a worker a non-compete clause, (therefore) an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date. No, that's not a misprint. If this rule goes live, it won't just prohibit future non-competes, it will also rescind existing non-competes. But wait, it gets even better. The term "non-compete" will be defined more broadly than you think, and may even encompass poorly constructed NDAs, "The term non-compete includes...a non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer." (910.1(b)(2)(i)).
I suspect an impetus for the FTC's proposed ban is our nation's ever-expanding digital landscape. In such a world, it becomes increasingly difficult to craft reasonable non-competes when so many workers and employers have nation-wide, online business models. Not to mention that the post-COVID, work-from-home, labor force extends the reach of business and employment opportunities even further.
Where Do We Go From Here?
Now I know what you're thinking, "Jack, this is a blog, not a legal treatise, so get to the point." Okay, okay, here it is: Now is the time to start planning for the post non-compete world. Remember, this is going to affect both new and existing non-competes. NDAs and non-solicitation agreements will have to be carefully re-crafted to avoid being deemed non-competes, so that the baby doesn't get thrown out with the bathwater (even if you don't like babies). And, perhaps more importantly, we will have to look for alternate methods of protecting business interests and property outside of these traditional means. So, before you send out that next IC Agreement, NDA, non-solicitation, or offer letter, call me for a review (703-397-7490; [email protected]) so we can take care of your legal needs while you focus on growing the business.
The author is GuideOn Legal Services (GLS) founder Jack Grimes, a military veteran, former Intelligence Community executive, small business owner, and JAG Corps Reserve Officer with over 20 years of experience in estate planning. He is among a limited number of attorneys in the country with an LL.M. (Master of Laws) in Estate Planning and Elder Law. The GLS motto Live Long, End Strong® epitomizes the full life-cycle approach our firm takes to estate planning. It starts with the end in mind, and then builds a lifetime and legacy plan, culminating in the peace of mind that comes with protecting your family's future by preserving assets from taxes, probate costs, legal issues, and unnecessary financial risk.