2024 FTC Regulations on Non-Compete Agreements
On April 23, 2024, the Federal Trade Commission (“FTC”) announced nationwide regulations prohibiting non-compete agreements in employment. That regulation takes effect on September 4, 2024. The regulations invalidate existing non-compete agreements except for agreements with senior executives and prohibit employers from asking employees, including senior executives, to sign non-compete agreements. The FTC based its new regulations on evidence that non-compete agreements restrain trade. It argued that such agreements keep wages low and prevent employees from leaving because leaving may require them to relocate, take a lower-paying job, or face litigation over enforcement of the non-compete agreement. On a macro level, noncompete clauses prevent innovation, suppress new ideas, and hold back new business start-ups.
The FTC’s new regulations ban enforcement of non-compete agreements after August 2024 and prohibit employers from requiring any employee to condition their employment on a non-compete agreement. Because of employer concerns that senior executives may have agreed to a non-compete agreement for benefits unrelated to a restraint of trade, the FTC included an exception to allow such agreements to remain enforceable. The “senior executive” exception applies to executives who earn more than $151,164 annually and who have “policy-making” authority. The regulations adopted the term “executive officer” from the Security and Exchange Commission’s regulations, 17 CFR §240.3b-7, which “means its president, any vice president . . . in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function or any other person who performs similar policy making functions . . .” Employers must apply that test to any non-compete agreements and should maintain only those for which the senior executive duties have that policy-making authority. Prior to September 4, 2024, employers will be required to notify affected employees that their noncompete agreement is being terminated.
Opposition to the FTC Regulations
Within days of the FTC’s release of its new regulations, several business organizations filed lawsuits challenging its authority to issue such broad regulations. The first lawsuit was filed within hours of the FTC’s announcement by Ryan, LLC, (a global tax services firm). That litigation was filed in the United States District Court for the Northern District of Texas and that court has since issued an injunction staying other complaints. Therefore, all plaintiffs are joining the Ryan, LLC plaintiff in that first litigation. The plaintiff employers argue that the FTC, like other federal agencies, must have specific power from Congress to address non-competes, which they claim the FTC does not have.
Conversely, the FTC referenced its specific authority to prevent restraints of trade and unfair competition–authority it claims Congress has clearly established. The court will be asked to decide if the FTC or the employer’s interpretation of the FTC’s authority allows it to issue the new regulations.
Impact of the FTC’s Non-Compete Rules in Hawai‘i
While the legal challenges may delay implementation of the new FTC rules, the fate of non-compete agreements appears to be written on Hawai‘i’s wall. Hawai‘i’s Legislature, in July 2015, eliminated the use of non-compete agreements for employees in technology and computer-related jobs, and Hawai‘i’s Supreme Court in Prudential Locations, LLC v. Gagnon, 146 Hawai‘i 239 (2020) recently reminded employers that non-compete agreements can only be enforceable if they are reasonable and are no greater than the protection the employer needs to protect its legitimate business interests. As the Prudential Court noted, using a non-compete agreement simply to prevent an employee from competing against the employer is an unfair method of competition and is invalid. “As a general rule, . . . any contract that is in restraint of trade or commerce, is illegal. HRS § 480-4(a).”
Leveraging Hawai‘i’s Uniform Trade Secrets Act
While the FTC’s new regulations would allow a departing employee to work for a competitor or to start a competing business, an employer could require employees to maintain the confidentiality of the employer’s trade secrets through reliance on Hawai‘i’s Uniform Trade Secrets Act (“UTSA”). The UTSA can be used to prevent harm that could be caused by a former employee’s unauthorized disclosure or use of the employer’s confidential or proprietary information. Employers can use Hawai‘i’s UTSA to protect its trade secrets from being disclosed to any third-party, from a former employee disclosing it to a new employer, or from a former employee using the information to unfairly compete against a former employer.
The UTSA and Hawai‘i courts have applied the term “trade secret” broadly. The statute defines a trade secret as:
[I]nformation, including a formula, pattern, compilation, program device, method, technique, or process that: (1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Haw. Rev. Stat. § 482B-2.
Hawai‘i courts have included client and customer lists/information, including past business, pricing, and discounts as well as profit margins, vendor contracts, and marketing strategies and programs as protectible trade secrets.
The UTSA allows employers to require confidentiality agreements which can prevent employees from taking, disclosing, or using an employer’s trade secrets without the employer’s authorization. It also provides for damages for misappropriating or disclosing trade secrets and discourages prospective employers from improperly obtaining a competitor’s trade secrets. So, the UTSA should be an effective tool to protect trade secrets.
Next Steps for Hawai‘i Employers
Employers should review all non-compete agreements with the expectation that the FTC’s regulations may be allowed to invalidate those agreements. Any agreements that would be exempt by the senior executive exception should be identified to ensure they can remain enforceable. For employer confidential, proprietary information and trade secrets, employers should have in place or prepare confidentiality agreements to ensure such information is protected and prevented from disclosure.
Cades Schutte can assist in either of those tasks and can help protect employer trade secrets. We will also monitor the litigation challenging the FTC’s new regulations and will provide updates.
