MIAMI BUSINESS LITIGATION: EMPLOYMENT NON-COMPETES WOULD BE NULLIFIED BY PROPOSED FEDERAL TRADE COMMISSION RULE

Under Florida law, non-compete agreements between employers and employees are allowed when they comply with the requirements of Florida’s restrictive covenant statute, Section 542.335, Florida Statutes. For years, Florida law has allowed non-compete agreements to protect apparent “legitimate business interests” referenced in Section 542.335(1)(b), such as, for example, protecting an employer’s interests in retaining trade secrets, goodwill with customers and referral sources, and investments in extraordinary or specialized employee training. However, much of Florida’s restrictive covenant statute would be effectively rescinded if a new rule proposed by the Federal Trade Commission (FTC) becomes effective. The FTC proposed rule would bar non-compete agreements with employees, including agreements which are not labeled as a “non-compete agreement,” but have the effect of barring an employee’s competition against his or her employer. The proposed FTC rule is set forth in a new Subchapter J, consisting of Part 910 to Chapter I in Title 16 of the Code of Federal Regulations. The proposed FTC rule has not become law at this point, and is subject to a comment period before being promulgated. In addition, the legal viability of the proposed FTC rule will likely be tested in state and federal courts. The courts will make the final decision regarding whether the final FTC rule is enforceable, or the extent to which it is enforceable. Peter Mavrick is a Miami business litigation attorney, and represents clients in business litigation in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

The proposed FTC rule defines a “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 recognizes that businesses sometimes have used contractual provisions that do not explicitly bar competion, but nevertheless have the effect of barring competition. The FTC proposed rule refers to such clauses as “de facto” non-compete contractual clauses. The proposed FTC rule sets forth a “functional test” to assess whether a contractual term operates as a prohibited, de facto non-compete clause:

“(2) Functional test for whether a contractual term is a non-compete clause. The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has the effect of prohibiting 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. For example, the following types of contractual terms, among others, may be de facto non-compete clauses:

i. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.

ii. A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.”

The proposed FTC rule prohibits as an “unfair method of competition” where an “employer to enter[s] into or attempt[s] to enter into a non-compete clause with a worker; maintain[s] with a worker a non-compete clause; or represent[s] to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.” In addition, under the proposed rule, “an employer that entered into a non-compete clause with a worker prior to the compliance date [of teh final FTC rule] must rescind the non-compete clause no later than the compliance date.” The FTC proposed rule also requires employers to inform its employees that “the worker’s non-compete clause is no longer in effect and may not be enforced against the worker.” The proposed rule requires the employer to provide this notice to its current and former employees (to the extent that the former employee’s contact information is readily available), “in an individualized communication. The employer must provide the notice on paper or in a digital format such as, for example, an email or text message. The employer must provide the notice to the worker within 45 days of rescinding the non-compete clause.”

Peter Mavrick is a Miami business litigation lawyer, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.