Every business fears having a competitor that knows its inner-most workings, or worse yet, access to their client base.  The first line of defense is typically prohibiting key employees from working for competitors.  The practice of having employees sign non-competition agreements slowly proliferated from key employees to others that may or may not have had access to vital business information.  The Federal Trade Commission (FTC) issued a rule banning non-competition clauses almost entirely based on the premise that these agreements prevent lower-level employees from realizing his or her value in the marketplace.  It remains to see what legal challenges may bring, but starting in September contracts with non-competes will have to make some changes according to the new rule.  Here’s what you need to know.

While the Federal Trade Commission Act exempts “common carriers” from the FTC’s jurisdiction (see 45 U.S.C. § 45(a)(2)), judicial decisions have limited this exemption only to the common-carriage activities of such businesses. (See FTC v. AT&T Mobility LLC, 883 F.3d 848, 863-864 ((9th Cir. 2018) (stating “[T]his interpretation means that the FTC may regulate common carriers’ non-common-carriage activities”.)) Logistics brokers may be for-hiring common carriers, but the FTC is likely to argue that the signing and enforcement of non-competes are outside their common-carriage activities. Brokers shouldn’t count on this exemption as a guaranteed get-out-of-jail-free card.

The final rule protects “workers”, broadly defined to include any natural person in a paid and unpaid position, specifically including independent contractors and even sole proprietors of businesses. The restriction on enforcing non-competes extends to all “persons”, including all natural persons and any sort of legal entity subject to the FTC’s jurisdiction.

The ban on non-competes has a handful of exceptions.  Existing (but not new) non-competes for “senior executives”[1] are exempted, as are any non-compete clauses related to the sale of a business, an ownership interest in a business, or substantially all of a business’s assets. Otherwise, no new non-compete clauses will be effective, and within 120 days of the rule’s publication, employers must provide any worker covered by an existing non-compete clause with a written notice that the clause will not be enforced.

Brokers should review their current contracts and form contracts for owner/operators, executives, dispatch employees, or any other persons to prepare to rescind, remove, or replace non-compete clauses. The FTC rule defines “non-compete clause” to include terms that prohibit or prevent workers from seeking work or operating a business after the conclusion of a work relationship, but limited restrictions on the most sensitive subjects that do not completely foreclose the possibility of competition will probably not be covered. For example, consider replacing non-competes with more limited restrictions on using confidential information an owner/operator obtained in the course of work with a broker, or on soliciting customers that an owner/operator met only through the work relationship with a broker. The comments to the final rule suggest that overly broad non-disclosure or non-solicitation agreements may, depending on the facts, functionally act as non-competes; however, they also approvingly state that “appropriately tailored” non-disclosure and non-solicitation agreements may be used to protect confidential information and client business in lieu of non-competes.

Note that litigation to block the FTC rule has already begun, and there are substantial questions about whether the rule is unconstitutional or exceeds the FTC’s statutory authority. It is very possible that this rule will be judicially blocked, temporarily or permanently.

[1] Defined as a person in a policymaking position with an annual salary of at least $151,164.

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