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What is a Non-Compete Agreement? What is the Federal Trade Commission’s Proposed Rule?

Recently, the Federal Trade Commission proposed a new rule banning non-compete agreements nationwide. The proposed rule is broad and would apply to nearly every worker, including independent contractors. The only workers exempt from the rule are non-competes between the seller of a business and the buyer, but only if the seller owns a minimum 25% interest in the business.

So what is a non-compete? Why do they matter? A non-compete agreement, also called a covenant not to compete or a non-competition agreement, is a promise not to work in a similar field for a specific period of time and in a specific region. Non-competes protect businesses from unfair competition from former employees by giving them time to adjust to the new competitive market. Former employees may have access to trade secrets, business strategies, or other information that gives the business a competitive edge. A former employee’s knowledge of the business will be less important a year or two down the road as the company naturally adopts new strategies and plans.

Non-competes can be an important tool for companies, especially when it comes to upper-level management. Managers tend to know more information about the company that they may leverage in a future position. However, not every company limits its non-competes to upper-level management or individuals who have special skills, training, or knowledge. One company, for example, used to make its warehouse workers sign non-competes. Another company, which sold sandwiches, would make its fast-food workers sign non-competes. Both companies have since abandoned this requirement, but the FTC has taken the position that many companies continue to limit worker mobility without justification. No state has passed a law as restrictive as the FTC’s proposed rule. If the rule is upheld by the courts, non-competes will be considered unfair method of competition under the Federal Trade Commission Act.

If you are a business owner who regularly uses non-competes, you may wonder how you can protect your business going forward under this proposed rule. One tool you may use is a non-disclosure agreement (NDA). A non-disclosure agreement will prevent an former employee from using or giving away your trade secrets and confidential information moving forward. Another valuable tool is a non-solicitation Agreement. A non-solicitation agreement prevents an former employee from poaching your clients or workers. While the former employee will still be able to join another business similar to yours, a Non-Disclosure Agreement or a Non-Solicitation Agreement can help protect you from an former employee’s use of your trade secrets, business strategies, or client base.

Because Non-Disclosure Agreements and Non-Solicitation Agreements do not prevent workers from gaining new employment, the FTC is not looking to ban them.

If you are looking for alternatives to non-compete agreements due to the Federal Trade Commission’s proposed rule, contact Gehling Osborn Law Firm, PLC. Gehling Osborn’s experienced attorneys can help you find and create an alternative that suits your needs and protects your business. Gehling Osborn’s attorneys are licensed to practice in Iowa, South Dakota, and Nebraska.

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