3 Tips for Businesses to Navigate the Current State of Noncompetes

This alert was originally published on Oct. 14, 2024, and was also published by Thomson Reuters' Westlaw Today.

A federal court recently struck down the FTC's nationwide noncompete ban, removing one obstacle for companies wishing to continue using these agreements. However, with state laws imposing limitations and potential federal legislation on the horizon, it is crucial for companies to periodically review their noncompetes to ensure compliance and alignment with their intended goals. Additionally, companies should consider using other tools to protect their business interests and adapt to any future regulatory changes affecting noncompetes. This article offers steps companies can take to shore up their agreements and protect their interests.

What business goals do noncompetes support?

Noncompete agreements are valuable tools to protect a business’s competitive edge. Common uses include:

• Safeguarding and preventing the disclosure of confidential and proprietary information and trade secrets.
• Retaining talent and protecting investments in employee training and development.
• Preserving valuable client relationships within the company.
• Preventing unfair competition and keeping acquired knowledge and skills in-house.

Are there risks to using noncompetes in the current landscape?

Despite their benefits, noncompetes come with several risks that businesses should carefully consider:

• Enforceability issues: Businesses must navigate a patchwork of state laws and regulations when drafting and enforcing noncompetes. State laws governing the use of noncompetes vary widely and change often. Some states have banned noncompetes altogether, while others have passed laws defining the acceptable duration, geographic scope, and restrictions for noncompetes. The enforceability of noncompetes can also hinge on whether states allow modifications to unreasonable provisions. Persistent changes to state laws on these issues mean businesses must frequently review and update their noncompetes to ensure they comply with current standards.
• Increased regulatory scrutiny: Although a federal court recently blocked the FTC’s rule banning noncompetes, the FTC rule highlights the heightened regulatory scrutiny these agreements face. Noncompetes remain a hot-button issue for agencies and lawmakers, many of which have expressed agreement with curtailing their usage. For example, in 2023, the National Labor Relations Board General Counsel, Jennifer Abruzzo, took the position that noncompetes violate workers’ rights to engage in concerted activities under Section 7 of the National Labor Relations Act. On Oct. 7, 2024, she announced a plan to take legal action against companies using certain provisions in noncompetes. The closely watched nature of noncompetes and rising legal challenges could lead to added compliance requirements and liability exposure for businesses using them.

What other methods can businesses use to protect their interests?

In light of the increased scrutiny on noncompetes, companies should consider additional measures to bolster the security of their business interests, such as:

• Nondisclosure agreements (NDAs):NDAs can protect confidential business information and trade secrets without restricting employee mobility. Appropriately tailored NDAs burden competition to a lesser degree than noncompetes. Such NDAs may prevent workers from disclosing or using certain information, but they generally do not prevent workers from seeking or accepting other work, or starting their own business, after their employment ends.

• Nonsolicitation agreements: These agreements can prevent former employees from soliciting clients or employees but do not restrict them from working for competitors. Such agreements are generally viewed as a more reasonable and valid method to protect a company’s interests in its employees and clients. However, such agreements can be declared unreasonable and invalid where they function to completely prevent a worker from seeking or accepting other work or starting a business in their field after their employment ends.
• Incentive programs: Offering long-term incentives, such as stock options and performance or retention bonuses, can encourage employees to stay with the company without using restrictive covenants. Further, employers who wish to retain their workers can also increase pay, offer better hours or better working conditions, or otherwise improve the conditions of their employment—i.e., compete to retain their labor services.
• Intellectual property protections: Trademarks, patents and copyrights can safeguard businesses’ brand identities and creative works from unauthorized use.

What steps can business owners take now to limit risk and prepare for possible changes?

The recent court ruling striking down the FTC’s noncompete ban provides temporary relief for businesses using these agreements. But it does not eliminate the need to prepare for future developments on this front. Businesses should:

1. Stay informed: Be on the lookout for legal developments at both the federal and state levels regarding noncompetes. The federal ruling that the FTC exceeded its authority to ban noncompetes, coupled with the Supreme Court’s overturning of Chevron, could slow federal action to restrict these agreements. But the FTC can still appeal the ruling, and other agencies are discussing noncompete limits. Businesses should also watch for future state efforts to govern noncompetes. In 2024 alone, legislators in nearly 20 states introduced bills banning or limiting noncompetes. Although the bills passed in just six states, this legislative interest highlights the need for companies to stay on top of the latest developments.
2. Review agreements: Regularly review and update noncompetes to ensure compliance with current laws and regulations. Blanket agreements can raise enforcement and liability risks. Companies may need to tailor noncompetes to the states – and often the industries – in which they operate. Frequently reviewing and adjusting noncompete agreements can assist companies in maintaining compliance with evolving laws.
3. Consider alternatives: Explore alternative methods to protect business interests to add security and avoid relying solely on noncompetes. Companies should start by evaluating the business goals they wish to achieve by using noncompetes. Depending on a company’s priorities and objectives, these needs may be best met by a combination of noncompetes and other measures.

Contact Madison DeWitt, Matthew Perez or any member of Phelps’ business or labor and employment teams if you have questions or need advice and guidance.