How Do You Draft an Enforceable Noncompete Agreement Under Florida Law? Apparently, You Don’t. (A 2024 Update)
A 2024 Update on Noncompetes
On January 5, 2023, the Federal Trade Commission (the “FTC”) announced it was looking to ban Noncompete clauses in employment agreements (a “Noncompete.”) This ban would prevent the creation of new Noncompetes, rescind all existing ones by declaring them a form of unfair competition, and make it illegal to represent to a worker that the worker is subject to a Noncompete (the “Noncompete Rule”). As with any widescale regulation, there’s been a bunch of activity since then, so let’s dive in!
What is a Noncompete?
A Noncompete is a type of Restrictive Covenant, which is an agreement to not do something. In a Noncompete Agreement, someone, usually an employee or independent contractor, agrees to not compete against another, usually an employer, for a certain period of time after ending their working relationship. Other examples of Restrictive Covenants include Nondisclosure Agreements (agreements to not disclose certain information) and Nonsolicitation Agreements (agreements to not take someone’s customers.)
Under Florida law, the justification for Noncompetes is that if an employer invests its time & resources into developing a competitive advantage, that employer should be able to protect the value of its investment by preventing its workers from using that competitive advantage to compete against the employer. The statutory term for this competitive advantage is called a Legitimate Business Interest. These Legitimate Business Interests can take various forms. Examples found in Florida Statute 543.335, include trade secrets & other valuable confidential or business information, customer goodwill & substantial relationships with existing customers, and extraordinary training beyond what is typical in the industry.It is worth noting that a Noncompete does not last forever. They must last for a reasonable amount of time after the working relationship ends and can only be enforced in a certain geographical area.
How a Noncompete Works
To provide a hypothetical of what a Noncompete is intended to prevent: imagine you run a company that relies on a trade secret you developed (like the Coca Cola formula to the Coca Cola Company, for example.) You developed it alone, spending your time and money to perfect it. As your company grows, you begin to hire employees. Before they are hired, you take all the steps necessary to keep the trade secret confidential. After the employees start working, only a few necessary employees know what the trade secret is or how to access it.
One of these few necessary employees is named Derek. One day, Derek informs you that he's decided to leave the company. Shortly after leaving, Derek opens a company that competes with yours. What’s more, his product is completely identical. This arouses your suspicions, as it took you a long time and a lot of money to refine your product to that point. So, you check the servers where your trade secret is stored. The server’s access logs show that Derek’s account downloaded the file containing the trade secret before he left the company. All signs point towards Derek using your trade secret in his competing company.
If Derek signed an enforceable Noncompete while he was working for you, the Noncompete could be used to prevent him from running his competing venture. If there was no Noncompete in place, then Derek has received the benefit of your trade secret without having to pay you for it or spend his time and resources to develop it on his own. An enforceable Noncompete can be used to stop Derek from using your trade secret to compete against you and protect the value of your investment in creating your trade secret. (NOTE: You’d have other remedies under state and federal law under these circumstances, but that’s beyond the scope of this article.)
Different Approaches to Noncompetes
This is just Florida’s approach to Noncompetes. Other states have different approaches. Some states have already banned Noncompetes; while others require that judges rewrite unenforceable Noncompetes to make them enforceable.The variation in the fifty states’ legislative & judicial approach to Noncompetes was so great that academics had developed an entire field of study around them. The “blue pencil” approach to a Noncompete meant to strike out unenforceable portions of a Noncompete while keeping the enforceable parts intact. To “red pencil” a Noncompete meant to eliminate an entire Noncompete due to one unenforceable provision.
I’m using the past tense here because once the FTC’s Noncompete Rule goes into effect all conflicting state statutes will be preempted and the field of academic discourse relegated to legal history. They will be preempted because the Federal Trade Commission is an agency of the federal government.Under the Supremacy Clause of the U.S. Constitution, any state law that conflicts with federal law is invalidated. So, unless you live in a state that has already banned Noncompetes (i.e. California, Oklahoma, Minnesota, and North Dakota) you have an interest in seeing how the FTC’s ban plays out because it will affect you.
Why the FTC Wants to Ban Noncompetes
According to the FTC, approximately 30 million people are under a Noncompete.The FTC further claims that Noncompetes harm the entire labor market because these agreements prevent workers from leaving jobs and decrease competition. This ends up lowering wages for workers and stifling innovation and entrepreneurship by having a chilling effect on the free flow of information in the marketplace. The Noncompete Rule is estimated to lead to the formation of more than 8,500 business per year, increase the wages of the average worker by $524 per year, and result in an increase of 17,000 to 29,000 patents each year over the next decade.
As part of the rulemaking process for federal agencies, the FTC was required to have a 90-day comment period, where the public could voice its opinions and concerns regarding the proposed Noncompete ban. And voice their opinions they did. By the end of the period, over 26,000 comments were made, some in favor and some against.
Ryan, ATS Tree Services, and the Future of the Noncompete Rule
The comment period ended in April 2023, and the final vote to issue the Noncompete Rule occurred almost a year later on April 23, 2024.It was approved by a 3-2 vote with all the FTC’s Commissioners voting.Unless someone sued to stop the Noncompete Rule from taking effect, it would do so on September 4, 2024. As it so happens, someone sued to stop the Noncompete Rule from taking effect. Literally the day after the vote, on April 24, 2024, the Chamber of Commerce along with several other business associations joined an lawsuit filed against the FTC in a federal court in Texas. This case is called Ryan, LLC v. Federal Trade Commission.On April 25, 2024, ATS Tree Services, LLC filed a lawsuit against the FTC in a federal court in Pennsylvania. This case is called ATS Tree Services, LLC v. Federal Trade Commission.
As these lawsuits unfold, we’re beginning to see some substantive decisions made. On July 3rd, Wednesday of last week, the United States District Court for the Northern District of Texas issued an order preventing the FTC from enforcing the Noncompete Rule, but only as to the plaintiff, Ryan, LLC. A more expansive ruling is expected in August.In the Eastern District of Pennsylvania, Judge Kelley B. Hodge is expected hold a hearing on July 10, 2024 at 12:00pm ET on ATS Tree Service’s motion for a preliminary injunction, with a decision expected to be issued on July 23, 2024.
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With the original effective date of the Noncompete Rule being less than two months away, it’s going to be an eventful couple of months for all parties involved. If you want to stay up to date on all things corporate law, be sure to follow TealAcre. You can contact us by email at admin@tealacre.com or by telephone at (352) 224-9811. Click here to schedule a complimentary 15-minute consultation. Click here if you’d like to register for our newsletter (yes, the sign up form is a Google form.)