Non-compete versus Non-solicitation Agreements

Q: I wish to protect myself from an employee soliciting my clients after that person leaves. Should I require the employee to sign a non-compete agreement?

A: On April 23, 2024, the Federal Trade Commission (FTC) announced its Final Non-Compete Clause Rule (“Final Rule”), which bans post-employment non-compete clauses between employers and their workers. The Final Rule becomes effective 120 days after being published in the Federal Register. The Final Rule was published in the Federal Register and the effective date is September 4, 2024.

Under the FTC’s new rule, existing non-competes for the vast majority of workers will no longer be enforceable after the rule’s effective date. There are several law suits pending that could delay the implementation of the “Final Rule” but it would appear that the days are numbered for non-compete agreements.

Non-compete agreements have always been difficult to enforce. Essentially this type of agreement precludes the individual from engaging in the same kind or similar business for a period of time or within a certain radius of the former employer.

The courts have deemed that this kind of agreement constitutes a restraint of trade. In other words, it is unfair to deprive someone of the ability to engage in a business for which he or she is qualified.

There are instances in which non-compete agreements have been upheld, when the seller of a business agrees to not engage in a similar business in exchange for specific compensation.

To protect trade secrets, customers, employees, and vendor relationships without relying on non-compete agreements, businesses can consider several alternative legal and practical measures.

There is often confusion between a non-compete and non-solicitation agreement. Based on your concern, it would appear that you should have your employees sign a non-solicitation agreement. The non-solicitation, or anti-piracy agreement restricts someone from soliciting your employees, trade secrets, formulas, records or existing customers of your business.

This is a common practice for attorneys, accountants, financial planners, insurance agencies and others who provide professional services.

For example, a key salesperson leaves your employ and attempts to lure his administrative assistant along with some key clients with whom he has rapport. They may, however, compete fairly for new customers.

There also is the nondisclosure, or confidentiality agreement that precludes someone from stealing trade secrets, inventions or other valuable information to gain a competitive advantage.

While these agreements might make someone think twice before taking something from a former employer, they are not foolproof. Even if you win the suit, it is usually a protracted and costly affair.

It is strongly recommended that you contact an attorney who is familiar with these agreements and how they are viewed by the courts in the state where the business is located.

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Gray Poehler is a volunteer with the Naples Chapter of SCORE, Counselors to America’s Small Business. To ask a question or request free and confidential business counseling, call 239-430-0081 or log on to https://www.score.org/naples/local-mentors