Agreements that limit an individual’s ability to compete with a former employer have been controversial and the subject of much legislation and litigation. Such agreements are now getting the attention of federal regulators as well. Consider the following…

Non-compete agreements…

As a general rule, the common law duty of loyalty prohibits an employee from competing with the employee’s employer during the term of employment. However, in the absence of an agreement to the contrary, an individual is free to compete with a former employer. Employers often require their employees to enter into an agreement that prohibits competition from the employee once the employment relationship ends. Such an agreement is known as a “non-compete agreement.”

Non-compete agreements are disfavored in the law because they limit an individual’s future employment opportunities and they reduce competition in commerce. In recent years, state legislatures and courts have become increasingly hostile to the concept of non-compete agreements. Some state legislatures have prohibited or significantly limited the use of non-compete agreements. Even where permitted, courts will not enforce non-compete agreements unless the restrictions protect an employer’s legitimate business interest, are reasonable in geographic and temporal scope, and are not harmful to the public at-large.

Traditionally, the use of non-compete agreements was usually limited to high-level executives or employees who had access to proprietary employer information. However, the trend has been for employers to require relatively low-wage, non-managerial employees to enter into such agreements as well. This practice has drawn the attention of federal regulators.

Federal intervention…

The Federal Trade Commission Act prohibits the use of unfair methods of affecting commerce or competition. It also empowers the Federal Trade Commission (“FTC”) to enjoin acts or practices that unfairly affect competition. The FTC has recently announced that it has taken legal action against three companies regarding their use of non-compete agreements. In each case, the FTC has ordered the companies to cease enforcing, threatening to enforce, or imposing noncompete restrictions on workers, and required the companies to notify the employees that they are no longer bound by the restrictions. The actions mark the first time the FTC has sought to halt the enforcement of non-compete agreements.  

Conclusion…

Non-compete agreements have been disfavored in the law. Courts scrutinize such agreements and state legislatures have increasingly prohibited or limited their use. It seems that federal regulators have joined the battle against non-compete agreements. Employers should familiarize themselves with these trends and plan accordingly. Please feel free to contact me if you would like more information about the FTC actions or non-compete agreements.

 

PLEASE NOTE: This blog is merely for the general interest of the reader. It is not legal advice or opinion and it does not create an attorney-client relationship. Please call me at 973-921-0600 if you’d like to have a free initial telephone consultation or learn more about me or my practice. Thank you.