FTC Noncompete Ban Includes Key Revisions, But Faces Uncertain Future

When the Federal Trade Commission (FTC) issued its final rule banning the use of most noncompete agreements, many insurance agents were naturally concerned by how the regulation might harm their businesses and the Big “I” heard from hundreds of insurance agency owners and executives within hours of the FTC’s announcement.

Independent insurance agencies rely – for appropriate and legitimate reasons – on employment agreements to protect their investments, customer relationships, and the goodwill and value of their businesses. Any measure that would prohibit or unduly restrict their ability to utilize these tools would be troubling.

The FTC rule takes aim at noncompete agreements and defines them as a term or condition of employment that “prohibits,” “penalizes,” or “functions to prevent” a person from working elsewhere or operating a business after leaving a particular job. Among the agreements that would be banned are those that expressly prohibit a person from working elsewhere, those that require a person to pay liquidated damages to do so, and severance agreements in which a person is paid only if they refrain from competing against a former employer. Pending the outcome of several legal challenges, the rule is scheduled to take effect on Sept. 4, 2024.

Agents who want to understand the impact of the regulation on their business should consider its key elements and take note of crucial revisions incorporated in the final text. Items to note include:

Exemption for Business Sales. The initial version of the rule, released in January 2023, included an exemption allowing the use of noncompete agreements in connection with the sale of a business, but it only applied to sellers possessing at least a 25% ownership interest in the entity.

The Big “I” and others successfully argued that this arbitrary ownership stake restriction should be eliminated. The final rule deletes the limitation and freely allows the use of noncompete agreements that are “entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

Other Employment Agreements. The regulation targets noncompete agreements and does not prohibit the use of other employment covenants. Nonsolicitation, nonpiracy, nondisclosure and other types of employment agreements are unaffected by the rule if their use does not penalize or prevent a worker from switching jobs or starting a new business. Protecting the ability of independent agents to use these alternatives in reasonable ways is a top priority for the Big “I.”

Existing Noncompete Agreements: The FTC’s initial proposal would have nullified any noncompete agreement entered into before the rule’s effective date. The final regulation takes a different approach and allows existing noncompete agreements with “senior executives” to remain in force. The rule defines a “senior executive” as someone who earns more than $151,164 per year and serves in a “policy-making position,” which is a term also defined by the rule. All other noncompete agreements will be invalidated after September 4 and businesses are required to disclose to affected workers that the agreements are no longer enforceable.

Will The Ban Survive Legal Challenges?

Now, the question about whether the rule will actually take effect looms. At least three legal challenges have been filed. The various plaintiffs have asked the courts to delay the rule’s implementation and to ultimately toss it aside. The biggest legal issue is whether the FTC possesses the statutory authority required to issue such a sweeping substantive rule. Many legal observers believe the FTC has overstepped its bounds.

Historically, states have been responsible for regulating noncompete agreements and legislation addressing their use is certain to arise in the future. California, North Dakota and Oklahoma have banned their use in most contexts for more than a century while Minnesota enacted a similar law last year. More than a dozen other states have restricted the use of noncompete agreements over the last decade with laws that ban their use in certain industries (e.g., healthcare) or for workers who earn less than a specified amount.

The Big “I” believes any legislation of this nature should, at a minimum, expressly permit noncompete agreements to be used when a business is sold, and not restrict the reasonable use of confidentiality, nonsolicitation and other employment agreements. In the last year, more expansive and onerous legislative proposals have been actively considered in some states, including in New York and Maine, and the agent community has opposed such measures.

Employment agreements, including noncompete agreements in some instances, are important business management tools for independent insurance agents. Protecting their reasonable use must remain a priority.