FTC Non-Compete Ban: What Insurance Agencies Need to Know
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By Mel Tull
The Federal Trade Commission (FTC) recently issued its final rule banning non-compete agreements. The rule is scheduled to become effective on September 4, 2024, unless it is delayed or blocked1 by the courts. Here’s what insurance agencies need to know about the rule, and what they should do now to prepare for the rule.
Background. Congress created the FTC in 1914 and provided it with general authority to prevent entities in the United States from engaging in “unfair methods of competition.” The FTC voted 3-2 along party2 lines to exercise that general authority and ban non-competes as “unfair methods of competition.” The two dissenting Republican Commissioners voted against the ban arguing the FTC’s general authority is not sufficient to ban non-competes and that such a law must be passed by our elected representatives in Congress. Several lawsuits have been filed challenging the final rule and the FTC’s authority to issue it.
The rule. The final rule prohibits employers from entering into new non-compete agreements or enforcing existing non-compete clauses with workers. Prohibited non-competes are essentially any term or condition of employment that prohibits, prevents or inhibits a worker from leaving one employer to work for a different employer or start a business. The term “worker” is defined broadly to mean any person who works, including an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service. Prior to the rule’s effective date, employers are required to provide written notice to current and former workers informing them that the worker’s non-compete clause will no longer be effective or enforceable.
Exceptions to the rule. The FTC ban does not apply to several circumstances relevant to insurance agencies.
- Confidentiality and non-solicitation agreements. The ban does not apply to post-employment restrictions on (i) the use or disclosure of confidential information or (ii) the solicitation of clients or employees. However, the FTC cautioned that a confidentiality or non-solicitation covenant could be deemed a banned non-compete if facts indicate it has the practical effect of preventing or inhibiting a worker from seeking or accepting other work or starting a business after their employment ends.
- Sale of business. The ban does not apply to a non-compete entered into by a person pursuant to the sale of a company, a person’s ownership interest in a business entity, or of all or substantially all of a company’s operating assets.
- Senior Executives. The rule includes a limited exception that allows employers to enforce non-compete clauses that existed before the rule’s effective date against senior executives. “Senior executives” are workers (e.g. company president or CEO or other high level executive) who (i) make at least $151,164 annually, and (ii) have final policy making authority over significant aspects of the company, which authority must be more than just advising or exerting influence over policy decisions or making policy decisions for a subsidiary, division or affiliate. The exception does not permit implementing new non-compete agreements with senior executives.
- Accrued claims. The ban does not apply where a cause of action for the breach or violation of a non-compete clause accrued prior to the effective date.
What should agencies do now? Because the rule will not become effective until September 4, 2024, and may be delayed or blocked by pending litigation, insurance agencies do not need to make immediate changes to their use of non-compete provisions. However, agencies should begin to prepare and make plans for what actions they will take if or when the rule becomes effective. Those preparations should include:
- Take inventory of non-competes and other restrictive covenants. Identify all non-compete, confidentiality, non-disclosure, non-solicitation, non-piracy, non-acceptance and other restrictive covenants in existing agreements with current and prior employees and contractors and in all form agreements the agency uses with new employees and contractors. Determine if your organization really needs non-competes or can other restrictive covenants suffice.3
- Consider applicable exemptions. Determine whether any identified restrictive covenants qualify for an exemption to the FTC ban, such as those involving non-solicits, senior executives or business purchases.
- Prepare to send written notices. Gather contact information for all current and former employees and contractors who are subject to banned non-compete covenants, and make plans for notifying those individuals that their non-compete covenants will not be effective or enforceable after the rule becomes effective. Agencies can wait to see if the effective date is delayed by the courts, but should be prepared to send the notices before the effective date if it is not.
- Consider enhancing confidentiality, non-solicitation and other restrictive covenants. Without non-competes, agencies may need to enhance their use of other restrictive covenants, such as non-disclosure, non-solicitation, non-piracy and non-acceptance covenants. When implementing or enhancing restrictive covenants, be aware of the following:
- Until the FTC or courts provide further guidance, it will be unclear what facts and circumstances might cause a restrictive covenant to be deemed a prohibited non-compete that functions to prevent a worker from seeking or accepting other work or starting a business after their employment ends.
- The federal ban preempts inconsistent state laws that are less protective of employees, but leaves intact state laws that provide employees greater protection. State laws governing non-solicitation and other restrictive covenants in the employment context often require such covenants to be narrowly tailored to protect the agency’s legitimate business interests while not unduly burdening the employee’s ability to earn a living.
- For enhanced restrictive covenants to be effective and enforceable, agencies may need to pay additional consideration to induce employees to agree to them.
- Agency and book of business acquisitions. When acquiring another agency or a book of business, use care to ensure the acquisition is adequately protected by non-compete covenants that fit within the sale of business exception or by other restrictive covenants that are not prohibited by the non-compete ban.
- Document accrued claims. Document violations of non-compete clauses that occurred prior to the rule’s effective date and are not affected by the ban. Take care that any notice informing prior employees that their non-competes will not be enforceable after the effective date does not suggest that remedies for violations that occurred prior to the effective date will not be pursued.
- Stay tuned. Watch the pending lawsuits for developments that could delay or prevent the rule from going into effect.
For more information about, or assistance with, the FTC rule banning non-competes, contact Mel Tull, at Mel@TullLawPLC.com or (804) 404-7748. Mel advises insurance agencies and other companies on general business law matters and buying and selling agencies and books of business.
This article has been prepared for informational purposes only and is not legal advice.
1. On April 24, 2024, the U.S. Chamber of Commerce sued the Federal Trade Commission in federal court in Texas to block the non-compete ban from going into effect because the agency overstepped its authority. See https://www.nytimes.com/2024/04/24/business/lawsuit-ftc-noncompete-ban.html There are expected to be several lawsuits in various state courts and it is expected there will be split decisions all over the United States making this case ripe for consideration by the Supreme Court of the United States.
2. The party controlling the White House gets to nominate three of the five Commissioners and all Commissioners are confirmed by the Senate with each serving a seven-year term. No more than three Commissioners can be from the same political party.
3. Even if the FTC ban is struck down, there are many states that are continuing to restrict non-competes either through legislation (Virginia has a low wage employee non-compete ban and the current wage is $73,320. See https://law.lis.virginia.gov/vacode/title40.1/chapter3/section40.1-28.7:8/) or through litigation in the courts.
