FTC Opens Proceeding to Ban Non-Compete Clauses Nationwide: Could Affect New York Contracts

Since 2008, New York broadcasters have been unable to use “covenants not to compete” as part of their underlying employment contracts with employees under NY State Law. (See NY Labor Law §202k). There are some exceptions to the rule. First, the ban in New York applies only if the covenant not to compete is part of the underlying employment contract. Stations could always negotiate a separate contract that could include a covenant not to compete. In addition, the ban applies only to contracts with employees. Stations could still use covenants not to compete in employment contracts for “managers.” In addition, stations could still include other provisions such as a “right of first refusal,” “non-solicitation” or “trade secrets/non-disclosure” provisions in a contract.

Last week the Federal Trade Commission (FTC) opened a proceeding that seeks to ban or limit covenants not to compete nationwide:

“The proposed rule would define the term “non-compete clause” as a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer. The proposed rule would also clarify that whether a contractual provision is a non-compete clause would depend not on what the provision is called, but how the provision functions. As the Commission explains below, the definition of non-compete clause would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements—because these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer. However, under the proposed definition of “non-compete clause,” such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.”

While many contracts for broadcasters will remain unaffected, the FCC’s proposal is broader than current New York law. Some non-compete arrangements that are perfectly legal in New York may now violate the proposed FTC regulations. The proposed FTC rule would supersede New York Law. The following are some of the major differences…

FTC rules apply to all “workers” including managers, independent contractors, interns, etc.: The ban in New York applies only to “employees.” The proposed FTC rule is much broader. New York law allows stations to use covenants not to compete for a manager’s employment agreement. This would be prohibited under the FTC regulation. In fact, the FTC is perhaps looking at exempting “senior executives.” In addition, the proposed rule would clarify that the term “worker” includes an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.

FTC rule bans non-compete provisions in all worker contracts: Under current New York law a station could enter into a covenant not to compete, provided the contract was separate from the underlying employment contract. After the initial employment contract is signed, some stations negotiate a covenant not to compete as part of a separate severance package. Under the proposed FTC rule, all covenants not to compete would be banned.

FTC rules affect non-solicitation and non-disclosure agreements: While stations may not sue a covenant-not-to-compete, New York law will permit the use of non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements. As noted above, these provisions may become illegal if they are “unusually broad” so as to function as a non-compete clause.

FTC rules apply to sales of businesses: New York law is specific to employees. Covenant not to compete provisions are allowed with respect to the sale of a business, provided they are not unreasonable. The proposed FTC rules would allow such covenants only where the person to which the restriction would apply owned 25% of the business. Thus, if you were buying a business and one of the sellers has less than a 25% ownership interest in the business, you could not bind that person with a covenant not to compete and prevent the person from competing against you. This is a major expansion of the concept, way beyond New York Law.

FCC rules require existing non-compete agreements to be rescinded: As noted above, the proposed FTC rule would pre-empt state law. Accordingly, the proposed rule would require that the provisions containing a covenant not to compete be rescinded. Employers would be required to notify workers that the provisions have been rescinded.

While New York Stations have become accustomed to not using non-compete provisions for employees, the proposed FCC rules go well beyond current New York Law. There is no doubt that the proposed rule will be extremely controversial across all industries. This is a fundamental change in American labor and business law. We are keeping a close watch on this proceeding.

You can find the FTC’s proposed rule here.

 

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