Non-Compete Agreements

Employee Agreements

FTC Appeals Ruling Against Noncompete Ban: What Employers Need to Know

On October 18, 2024, the Federal Trade Commission (FTC) officially filed an appeal to the U.S. Court of Appeals for the Fifth Circuit, challenging a district court ruling that struck down the agency’s proposed ban on most noncompete agreements. This move follows the August 20 decision by the U.S. District Court for the Northern District of Texas, which concluded that the FTC overstepped its authority in issuing such a sweeping rule. The ruling was a significant victory for employers using noncompete agreements, but the battle is far from over.   Background on the FTC’s Noncompete Ban The FTC initially approved the noncompete ban in April 2024, aiming to prohibit employers from entering into or enforcing noncompete agreements with most U.S. workers. The agency argued that noncompetes suppress wages, stifle innovation, and limit competition. The proposed rule was set to affect nearly 30 million employees, or about 20% of the U.S. workforce, and was scheduled to take effect on September 4. In particular, the ban targeted agreements that prevent workers from taking jobs at rival firms or starting their own businesses in the same industry. The rule included exceptions for specific sectors, such as airlines and financial services, and carved out allowances for senior executives earning more than $151,000 annually.   The Court’s Ruling: Ryan LLC v. FTC The court’s August ruling, brought forward by tax services provider Ryan LLC and various business groups, dealt a major blow to the FTC. U.S. District Judge Ada E. Brown ruled that the agency did not have the authority to impose such a broad regulation, calling the rule “arbitrary and capricious.” According to the court, the FTC’s blanket ban ignored the legitimate business interests of employers, such as protecting trade secrets and preventing the loss of key employees to competitors.   What Happens Next? As the appeal process unfolds, employers must remain vigilant. The district court ruling has temporarily blocked the FTC’s ban from going into effect, but there is still uncertainty. Should the Fifth Circuit rule in favor of the FTC, employers may face a new regulatory landscape in which noncompete agreements are drastically limited.   Key Considerations for Employers While the appeal works its way through the courts, employers should take proactive steps to prepare for potential outcomes. Here are several actions businesses can consider: Review Current Agreements: Now is the time to conduct a thorough audit of any existing noncompete agreements. Ensure they comply with applicable state laws, which still govern noncompetes in the absence of a federal ban. Focus on Alternatives: In the event that noncompete agreements are further restricted or banned, employers can explore other legal tools to protect sensitive information. Confidentiality agreements, nondisclosure agreements (NDAs), and nonsolicitation agreements are common alternatives. Monitor Legal Developments: Stay updated on federal and state-level legal changes. The appeal in the Fifth Circuit could take months or longer, but the impact will be significant for businesses that rely on noncompetes.   The Broader Debate: Employers vs. Workers’ Rights The FTC’s proposed rule and subsequent litigation underscore the ongoing debate between employer rights and worker mobility. While advocates of noncompete agreements argue they are essential for protecting trade secrets and investments in employee training, critics claim they unfairly limit job opportunities and suppress wages. As the legal landscape continues to shift, businesses must be ready to adapt to new regulations while safeguarding their competitive interests. At Luchansky Law, we are closely monitoring the developments in this case and are available to assist employers in reviewing and revising their employment agreements. If you have questions about how the FTC’s proposed ban or the current appeal might affect your business, contact our team with questions.    About Luchansky Law Luchansky Law is a premier labor and employment law firm committed to providing exceptional legal representation and client service. Founded in 2004 by Bruce Luchansky, the firm offers a wide range of legal services to businesses and individuals, focusing on workplace issues, employment disputes, and compliance. Luchansky Law is dedicated to upholding the highest standards of diligence, professionalism, and compassion in its practice. Please call (410) 522-1020, email us at info@luchanskylaw.com, or stop by our office at 606 Bosley Avenue, Suite 3B, Towson, Maryland, 21204.    References  Federal Trade Commission. (2024, October 18). FTC appeals decision in Ryan LLC v. FTC. Retrieved from FTCPress Release U.S. Chamber of Commerce. (2024). U.S. Chamber challenges FTC noncompete rule in court. Retrieved from U.S. Chamber of Commerce website Society for Human Resource Management (SHRM). (2024, October 19). SHRM’s response to the FTC noncompete rule appeal. Retrieved from SHRM.org  

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Maryland Noncompete and Conflict of Interest Clause Act

As of October 1, 2019, Maryland joined other states across the nation by enacting the Noncompete and Conflict of Interest Clause Act (NCICA) to prohibit non-compete clauses and conflict of interest clauses for employees who earn equal to or less than $15.00/hour or $31,200 annually.  The State of Maryland has deemed non-compete and conflict of interest clauses for lower paid employees to be against public policy and considers them null and void. Significantly, the NCICA prevents enforcement of non-competition clauses even while such employees are still employed.  The law does not, however, place any limitations on agreements which restrict the use or possession of proprietary client-related materials and information.  The NCICA does not provide any penalty for an employer who compels an employee to enter into a prohibited agreement, nor does it allow employees to sue employers who require them to sign the prohibited agreements. Rather employees will likely rely on the NCICA as a defense to a claim by their employer that they have violated a non-compete provision. If you are a Maryland employer and need assistance with Maryland employment law changes such as NCICA, please contact Luchansky LAW for a consultation.

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Some states are beginning to outlaw Non-competes. Is Maryland next to follow this trend?

Covenants not to compete (often referred to simply as “noncompetes”) have become ubiquitous in employment agreements, particularly for executives and other mid- to high-ranking individuals.  The long standing status quo regarding non-competes in the majority of states—including Maryland—is that they are fully permissible, subject to a case-by-case judicial balancing test that considers the interests of the former employer against the hardships to the employee and the public.  However, some states are now changing the state of affairs. Earlier this year, California enacted a statute which made it the first in the nation to largely prohibit noncompetes in employment contracts.  Specifically, California Business & Professions Code § 16600 provides that “[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”  In layman’s terms, even if an employee signs a contract with a noncompete, or covenant not to solicit the employer’s clients, the employer is still prohibited from enforcing this otherwise voluntary agreement (subject to certain exceptions outlined in sections 16601 through 16607.  Save for the narrowly defined exceptions, California’s law effectively invalidates most noncompetes contained in an employment agreement. Closely following suit, in September of this year, Massachusetts Governor Deval Patrick came out in support of eliminating the enforceability of non-competes in his state, regardless of covenant’s duration or geographic scope,  to Gov. Patrick, non-competes repress innovation and encourage entrepreneurs to flee Massachusetts for greener pastures. Are California and Massachusetts on to something?  If other states follow suit, will it result in stimulating the economy and fostering growth and increased mobility?  It is difficult to say.  The actual impact of these new laws will only be revealed over time. While noncompetes remain enforceable in Maryland, current law provides that they must be reasonable in scope of activity, time, and geography.  The requirement of these factors limits the damage that noncompetes can inflict on an individual’s career and entrepreneurial ambitions.  While Maryland’s approach to noncompetes isn’t without it’s flaws, it certainly isn’t clear at this point that the extreme positions staked out by California and Massachusetts are perfect either. Maryland employers or employees who have additional questions about non-competes or any other issues arising in the workplace are welcome to contact attorney Judd G. Millman.  Mr. Millman is licensed to practice law in both Maryland and Texas, and he focuses exclusively on the area of employment law.  He regularly counsels both employees and employers on the myriad of legal issues which arise in the workplace.  He can be reached directly at (410) 522-1020 or at judd@luchanskylaw.com.

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Anatomy of “Non-Compete” Agreements

Most Maryland companies that utilize salespeople to conduct their business are familiar with “Non-Compete Agreements.”  These are the agreements that prevent an employee from leaving the company and taking all of the company’s customers with them to their new employer.  Most companies don’t know, however, exactly what is in these “non-competes.”  In many cases, the agreement is one that was drafted by a Maryland employment lawyer years ago.  Often, it has been copied over and over again, perhaps making changes here and there, without much thought going into whether the agreement still is valid, or whether it fits the particular circumstances of a particular employee.  Sometimes employers just grab a form off of the internet.  Employees often sign these agreements without considering exactly what they are signing, simply resigned to the fact that if they want to get the job, they have to sign the document.  We think that both Maryland employers and employees should know a little bit more about these important agreements.  And the starting point is to know what the standard restrictions are that you can expect to find in a “Non-Competition Agreement.” Non-Competition Provisions v. Non-Solicitation Provisions in Maryland There are two different kinds of restrictions that a non-competition agreement can, and often does, contain.  The broader provision – meaning, the one that restricts the employee more – is called a “non-competition” clause or provision.  A non-competition provision prohibits a former employee from doing any kind of work for a period of time after leaving the company that would compete with the former employer.  In most cases, that means that it prohibits the employee from setting up his own competing business, or working for a competitor, usually for a period of 1 – 2 years.  By having the employee “sit on the sidelines” in the market for a period of time, the company gives itself time to reestablish its relationships with the customers previously serviced by its former employee.  Of course, this provision is very harsh for an employee, and the courts do not like them since they handcuff an employee’s right to earn a living without interference.  Nevertheless, as long as these provisions are reasonable in geographic scope and length of time, the courts will uphold them. A “non-solicitation” clause or provision, however, is narrower – meaning, it restricts the employee less than the “non-compete” provision.  A “non-solicitation” clause simply prohibits an employee from soliciting the employee’s former customers for a period of time after leaving the company.  There is no prohibition against the former employee setting up a competing business, or going to work for a competitor right away after leaving his or her employment.  The employee simply is restricted from going after the customers he or she previously serviced at the old job for a period of time, which usually is between 1 – 2 years.  Employees need to know that they should not expect to get around a non-solicitation clause by being shrewd, for example, by working at a new company and having one of their new co-workers go after their old accounts (instead of contacting those previous customers directly).  Plans like that will not succeed.  These provisions are universally drafted to prevent employees from soliciting their old accounts either “directly or indirectly” – and the courts know very well what an “indirect” solicitation looks like.  Nevertheless, as long as the employee leaves the old accounts alone, they get the benefit of getting to work right away, without having to sit on the sidelines of their chosen profession, job, or industry.  In addition to providing for non-solicitation of accounts or customers, “non-compete agreement” also usually contain a provision that prohibits former employees to solicit their previous co-workers to leave the old company with them. Expect to Find Both a “Non-Compete” and a “Non-Solicitation” Provision in a “Non-Competition Agreement” Despite the win-win proposition that a non-solicitation clause provides and which makes it a more well-balanced approach toward imposing these restrictions, most Non-Competition Agreements usually contain both a non-competition clause and a non-solicitation clause.  There are many reasons that contribute to this practice, including institutional habit, and a perception that the non-compete provides greater protection for a former employer than a non-solicitation agreement would.  Nevertheless, limiting an employee’s post-employment restrictions to non-solicitation provisions, rather than non-competition clauses, increasingly is the sign of a more evolved and well-balanced working environment, and former employees often are more motivated to comply voluntarily with non-solicitation agreements than non-competition agreements. As with all legal agreements, the Non-Competition or Non-Solicitation Agreement must be drafted with care.  At Luchansky Law, our Maryland employment law attorneys regularly draft or review many different kinds of agreements relating to the workplace, including employment agreements, severance agreements, settlement agreements and releases, separation agreements, employee handbooks, confidentiality agreements, and, of course, non-competition and non-solicitation agreements.  Schedule a Consultation If you need an employment-related document drafted or reviewed, call Bruce Luchansky, Esq. or Judd Millman, Esq., at Luchansky Law, 410.522.1020.  Luchansky Law is a law firm located in Towson, Maryland that is dedicated to the practice of Maryland Workplace Law, addressing legal issues that arise in connection with the Maryland workplace.  Call our Maryland employment lawyers with your question today for a consultation.

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Should Employers Make All of Their Employees Sign Non-Competes?

Most employers know that it is a good idea to have employees sign “non-competes” – that is, agreements that limit the extent to which current employees may compete against the employer if the employee leaves and wants to start working somewhere else.  Many employers get so excited about this protection that they require all of their employees to sign a non-compete, including not only sales people, but also bookkeepers, secretaries, and the clerks working in the mail room. Is such an approach a good idea? To answer the question, we first have to understand an important point about non-competition agreements.  Specifically, we have to understand what interest of the employer non-competes are designed to protect, and by extension, what they are NOT designed to protect. In Maryland, employers primarily are permitted to use non-competition agreements to prevent employees from using their relationships with a business’s customers to the employee’s own advantage once their employment ends.  For example, computer IT companies depend on their technicians to develop relationships with the customers of the business in order to keep the customers satisfied, to earn additional business from them, and to develop good will and future referrals.  In many cases, the companies’ customers do not even know the owner of the IT company.  What they do know is the name of the computer technician who works on their account and that technician’s capabilities.  If the technician were to leave the IT company that employs him, it would be easy for the technician to let “his” customers know that he is going to another company, and it is likely that the customers would follow him to his new place of employment. Non-competes are designed primarily to protect against that situation, a situation that would constitute unfair competition by the employee.  After all, the company hired the technician to develop customer relationships for the benefit of the company.  The employer supported the relationship and encouraged the technician to get to know the customer – but only on behalf of the employer.  It would be fundamentally unfair for the employee to take the company’s investment in this relationship with its customers and steal that investment from the company.  And, therefore, companies may prohibit employees from capitalizing on that relationship for a period of time after the employment ends. But when employers have their secretaries and controllers sign non-competes, they are not following this principle.  Secretaries and controllers – and many other company employees – do not have relationships with the company’s customers.  When it comes to these employees, the employer simply does not have a “protectable interest” that would justify having them sign non-competes.  Making them do so would be at best a waste of time, and at worst, it may undermine the legitimacy of the company’s proper non-competes in the event that a company ever were required to enforce such an agreement against its sales people. Therefore, choosing the employees who should sign a non-compete often is just as important as deciding what terms to include in the non-compete agreement.  If you currently utilize non-competition agreements, or if you have been intending to put these agreements in place, you would benefit from having a Maryland employment law attorney review your approach to this crucial layer of protection for your business.  Call Bruce Luchansky, Esq., of Luchansky Law, the premier employment law firm in Towson, Maryland, at 410.522.1020, and speak to one of our employment law attorneys to make sure that your non-compete is enforceable, and that it will protect the business interests that you worked so hard to develop.

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