Non-compete agreements between employers and employees have long been used in employment relationships, despite their potentially anti-competitive effect. They are both common and highly controversial.
For decades, the use of post-employment restrictions – including covenants not to compete, non-solicitation agreements, non-disparagement agreements and confidentiality agreements – have been used by employers. Corporate employers typically impose these restrictions, in both employment agreements and in severance and separation agreements. Disputes concerning the use of, scope and enforceability of these agreements have been the subject of a substantial state and federal court litigation. Now state and federal legislators are getting involved.
The Proposed Rule of the Federal Trade Commission
The FTC’s proposed rule seeks a near absolute ban on non-compete clauses in parties’ agreements (with a single exception not applicable in the typical employment relationship).
A significant departure from existing laws
The proposed rule significantly changes many state laws. It upends well-settled federal and state court laws and more recent state legislation designed to precisely regulate the use of post-employment restrictions based on a “balance of interests” test.
There is legislation before New York and New Jersey seeking to change the common law and further restrict the use of overly broad non-compete agreements. The proposed legislation, for example, incorporates the factors used by our state courts to evaluate the validity of non-competes:
“A non-compete agreement is only enforceable if such agreement: (a) is no greater than required for the protection of the legitimate interest of the employer; (b) does not impose an undue hardship on the employee; (c) is not injurious to the public; and (d) is reasonable in time period and geographic scope.”
What to expect if the Rule is adopted
It is expected that the Proposed Rule, if passed, will generate substantial and wide-ranging litigation. Does the FTC even have the authority to impose a sweeping new law that seems to interfere with the freedom to contract?
So What’s our Takeaway?
It may take years for the Proposed Rule to become effective in one form or another. It was not read in any final form the way it was introduced. Employers in the meantime should remain disciplined as to how and when they impose non-compete agreements.
To discuss your NJ business or commercial law matter, please contact Fredrick P. Niemann, Esq. at (732) 863-9900 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Business and Commercial Law Attorney