Noncompete decision: N.J. lawyers express some concern — and a lot of caution

Ruling by FTC will be appealed, and may not hold up, but movement against noncompete clauses is coming

The decision by the Federal Trade Commission to ban most noncompete agreements — and have the ruling go into effect in 120 days — certainly sent shockwaves throughout the business community Tuesday night, hours after it was released.

On Wednesday, numerous New Jersey lawyers offered the following advice: Slow down, take a minute to gain an understanding of what this really means — and understand there is little chance this will take effect in 120 days, if at all.

Lawsuits challenging the ruling are being filed.

Hugh Murray III, chair of the Labor and Employment Practice Group at McCarter & English, offered this advice to business owners.

“Take a breath,” he said. “The effective date of the rule is 120 days after publication in the federal register, which will happen this week. So, the earliest the rule will take effect will be August.”

He went on to say: “Take another breath. Lawsuits by business groups have been teed up and will be filed today or tomorrow seeking to invalidate the rule on multiple grounds. Those challenging this broad rule have lots of strong arguments and will have carefully selected their forum (probably a specific district court in Texas).”

Murray estimates there is better than a 50% chance that the rule does not go into effect in August because of litigation.

Marisa Rauchway, who leads the franchise team at Chiesa Shahinian & Giantomasi, offered insights along the same lines for those in that industry.

“Those in franchise relationships need to be careful to not just read the media headlines on this ban,” she said. “The new FTC rule does not apply to noncompetition provisions in franchise agreements between franchisors and franchisees, but it does apply to the relationships between franchisees and their employees (and franchisors and their employees).”

This is not to say that business owners should dismiss this ruling. It will have impact, said Frank Wukovits at CSG Law. How much is unclear — but impact enough that business leaders need to prepare.

“The FTC’s monumental new rule will have a profound impact on many businesses and their employment, recruitment and retention strategies, particularly with respect to highly coveted senior managers, sales representatives and technologists,” he said. “Moreover, employers must proactively contemplate their existing relationships and written agreements in effect with not only their current and former employees, but also their independent contractors, externs, interns and even volunteers.”

Patricia Prezioso, chair of the employment and labor practice at Sills Cummis & Gross, said there is plenty of confusion.

“Within the rule itself, noticeably absent are specifics about enforcement and penalties,” she said. “The rule defines entering a noncompete, enforcing a noncompete or representing that a worker is subject to a noncompete as ‘unfair methods of competition.’

“One has to question why the FTC saw fit to provide employers with a ‘safe harbor’ provision relating to its notice requirement, yet, there has not been clear communications on the ramifications on employers who fail to send out the required notices. It is also troubling that the notices are required to be sent to impacted workers and former workers before the effective date of the rule.”

Joshua Weiner, who co-chairs the Labor and Employment Group at Lindabury, McCormick, Estabrook & Cooper, said there are other options for business owners, regardless of what ultimately comes off the FTC ruling.

“While this new rule bans noncompete agreements, it does not prevent businesses from entering into nonsolicitation or nondisclosure agreements with their employees,” he said. “These types of restrictive covenants will still be enforceable so long as they are not overly broad, whereby they can be construed by the courts as a noncompete agreement.

“Employers should take time to review their nonsolicitation and nondisclosure agreements and amend where necessary to enjoy the protections these agreements provide while not restricting their employee’s ability to move within their industry.”

Patrick McGovern, chair of the labor and employment group at Genova Burns, said eliminating noncompete clauses will be most felt in employee compensation.

Previously, the threat of a noncompete could keep wages down. If it’s eliminated, it will have to be factored in.

“The effect of the noncompete is the ‘stick’ — it keeps the employee tethered to the employer because the employee who signs a noncompete and then resigns might have to leave the industry for a year or two before joining a competing company, or risk being sued for breach of the noncompete,” he said.

“If the final rule is upheld, employees will have more mobility in the workforce and greater job opportunities, since an employer may not attempt to enforce the noncompete after the effective date of the rule. From an employer’s perspective, it will need to consider other tools to lock up a valuable employee, such as market compensation, retention agreements, and equity and benefit awards that have vesting schedules.”

Murray said the 120 days offers employers — at a minimum — time to prepare for a coming change in employment law, one he is convinced is coming in one form or another.

“Even if the rule is delayed or never implemented, the tide is moving quickly with regard to noncompete agreements at the state level,” he said. ‘It is more and more difficult for a business to enforce a noncompete for its employees, especially if the employee can simply move to a different state that does not allow such agreements. Businesses that have heavily relied on noncompetes should be rethinking their overall strategy for protecting trade secrets, client relationships and employee retention.”

Prezioso agreed.

“Sills has been encouraging its clients and working with many on trade secret protection programs, which now should be viewed as critically important in light of this further development in an already weakening national landscape concerning noncompete enforcement,” she said. “Trade secret laws can protect an employer’s sensitive nonpublic information, and the ability to protect such information starts with demonstrating that the company seeking enforcement took reasonable steps to protect its information.”