On April 23, 2024 the Federal Trade Commission (“FTC”) issued a final rule to ban noncompete agreements across the country.[1] A noncompete is an agreement between an employer and a worker that blocks or hinders the worker from working for a competing employer or starting a competing business within a specified geographic area for a specified period of time.[2] Notably, the noncompete ban applies to employees, independent contractors, gig workers, and other worker classifications equally.[3] The FTC reasoned noncompete clauses are unfair methods of competition which reduce workers’ wages, stifle new business, exploit workers, and inhibit economic liberty.[4] This broad, sweeping rule not only invalidates current and future noncompete clauses, it requires employers advise their workers subject to noncompetes that such provisions are no longer valid.
This rule does not apply to other restrictive employment covenants such as non-disclosure agreements, client non-solicitation agreements, and other covenants that do not prevent a worker’s employment with another person or business after the worker’s employment concludes. However, the rule applies to overly broad employment covenants which effectively act as a noncompete or otherwise prevent a worker from obtaining employment elsewhere.
There are important exceptions to this rule. First, the ban does not apply noncompetes after the sale of a business. This is an attempt to protect the value of the business acquired by the buyer and prevent the seller from immediately starting a competing business. It further does not apply to causes of action arising prior to the rule’s effective date, September 4, 2024. Existing noncompetes restricting senior executives are not affected by this rule, however, the rule prevents new noncompetes from being imposed on senior executives. The FTC’s “senior executive” definition is two-pronged—a senior executive is a worker who (1) is in a policy-making position; and (2) received annual compensation of at least $151,164 in the preceding year.[5] Noncompetes between businesses are also excepted from the ban.
Additionally, certain industries are exempt from this rule as the FTC does not have rulemaking authority over them. These include banks, persons, partnerships, and corporations subject to the Packers and Stockyards Act, certain 501(c)(3) non-profits, and other entities Congress specifically exempted.
The FTC estimates this rule will apply to over 100 million workers and increase worker wages by $524 per year. Currently, almost 218,000 Wyoming workers are subject to a non-compete clause, according to the FTC, and a noncompete ban will increase Wyoming worker wages by $500 per year.[6] Banning noncompetes, the FTC asserts, allows workers to pursue better employment opportunities, creates more efficient businesses, and more effectively allocates human capital. This rule, however, has significant ramifications for employers across the country.
What does this mean for Wyoming:
Wyoming law on noncompetes has changed significantly over the last few years and makes this rule particularly relevant. Noncompetes were never favored in Wyoming and courts consistently construed them narrowly, often enforcing them only when reasonably necessary to protect employers. Skaf v. Wyo. Cardiopulmonary Servs., P.C., 2021 WY 105, ¶ 56, 495 P.3d 887, 905 (Wyo. 2021) (C.J. Davis, concurring). Wyoming law on noncompetes saw significant changes in recent years, however. Notably, the Wyoming Supreme Court eliminated the blue pencil rule, which previously allowed employers to draft overbroad noncompete clauses and rely on courts to revise them to an acceptable limitation. See Hassler v. Circle C Res., 2022 WY 28, ¶ 30, 505 P.3d 169, 178-79 (Wyo. 2022). Potentially thousands of overly broad noncompetes in effect before the Hassler decision were effectively invalidated and could no longer be saved by the blue pencil rule. Logically, this decision should have led those in the legal field to draft narrower and more limited noncompete provisions to minimize the risk a court would invalidate the entire provision.
Noncompetes have long been used to protect businesses and industry from losing their investment in the labor force. They have also been used to protect trade secrets, competitive advantages, and client loyalty. The FTC’s noncompete ban will require creative solutions to protect labor force investment. However, there are alternatives to continue protecting a business’ confidential information and competitive advantages.
A business’s trade secrets are one of its single most important tools to develop a competitive advantage in its industry. State and federal trade secret protections have grown in recent years and such protections prevent trade secrets from misappropriation. See 18 U.S.C. § 1836; Wyo. Stat. Ann. § 40-24-101 et seq. “Trade secrets” are defined in a broad and nuanced way but in essence, refer to any information a company holds that retains economic value from not being widely known, including but not limited to, formulas, designs, or techniques, client lists, programs codes, and other tangible or intangible information. 18 U.S.C. § 1839 (5). Misappropriation also has an expansive definition and includes any improper acquisition or disclosure of a trade secret, including instances the recipient or discloser knew or should have known the information was meant to be kept secret. 18 U.S.C. § 1839 (6). These laws are meant to protect businesses from distribution of a competitive advantage they have gained and bar employees or workers from taking “trade secrets” and sharing them with their next employer. These laws are of particular importance now that one of the tools in the toolbelt to retain a competitive advantage is gone. Businesses can recover damages and request injunctive relief should a former worker misappropriate its trade secrets.
Next, non solicitation and client noncompete clauses (“non solicitation clauses”) allow businesses to protect their client lists and customers. Non solicitation clauses are not affected by the FTC rule unless they are so overbroad they effectively act as a noncompete. Importantly, Wyoming has distinguished between non solicitation clauses and noncompete clauses. Skaf v. Wyo. Cardiopulmonary Servs., P.C., 2023 WY 86, ¶ 31, 534 P.3d 892, 900-01 (Wyo. 2023). Non solicitation clauses, broadly speaking, bar workers from soliciting business from their former employer’s clients. As an example, an employee of a cleaning service may have access to a list of clients to whom the employee regularly provides services to. If the employee terminates his employment with the cleaning service, and is subject to a non solicitation clause, the employee would be barred from reaching out to the service’s clients to seek out work for his new business. He further could be barred from providing services to any of his former employer’s clients, depending on certain circumstances. Such narrowly tailored provisions are not banned by the FTC final rule and are an important tool to protect your business.
Conclusion
The FTC final rule increases the risk of businesses losing their investment in their workers. It does not affect other ways to protect the information former workers may bring with them to their new employment or from preventing former employees from pursuing a business’s clients. However, under the current caselaw in Wyoming, it is more important than ever to carefully draft provisions in any employment or independent contractor agreement to protect your business. If you have any questions regarding this new rule or would like assistance reviewing or drafting employment agreements with adequate protections, please contact the attorneys at Hirst Applegate, LLP.
[1] FTC Announces Rule Banning Noncompetes, Federal Trade Commission (April 23, 2024) (https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes) (last visited July 4, 2024).
[2] 16 CFR § 910, 38342.
[3] Id. (“The final rule defines ‘worker’ as ‘a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.’”).
[4] Fact Sheet: FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Federal Trade Commission (https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete_nprm_fact_sheet.pdf) (last visited July 4, 2024).
[5] The $151,164 annual salary threshold applies to workers who worked only part of the preceding year or departed from employment prior to the preceding year. If the worker received annualized compensation over $151,164, the policy-making worker meets the annual salary threshold exception.
[6] Supra note 3. Appendix A.