First, there is no rush for employers or employees to react; the original FTC Rule was to take effect after 120 days of publication, but as anticipated litigation has been entered by several parties including the US Chamber of Commerce to void the proposed Rule as violative of the Constitution.  The crux of the claim is that a Federal agency (here, the FTC) does not have the constitutional power to in effect pass legislation which is not within the fair purview of the laws giving that agency its regulatory mandate.  Congress could, if it chose, address the matters addressed by the FTC–just not the agency absent Congressional mandate.

Interestingly and to me surprising: many recognized legal scholars agree that the Rule is an example of a Democrat-driven agency being overly aggressive in its regulatory posture.  And, I do not mean to engage that politically charged discussion which presents itself also and legitimately as a constitutional question.

Robust commentary in the last day or two has clarified certain elements of the proposed Rule, and those I address in part below.

First it is important to explore the different treatment between senior executives and “workers” who are not, as they are treated differently.  A senior executive is indeed a rare breed.  Not only must that person earn in excess of $151,000+ per year, but also must have authority to make policy.  Further, that policy-making power must be at a very senior level, it is not just making work rules or the like.  The power to make policy must have two attributes: the policy must be final and must be highly significant.  Sounds like CEOs and Presidents. These are the only people likely to be executives in this model; this category, which can be bound more profoundly to noncomps, is not a catch-all by which employers can just increase pay in order easily to bind high earners to noncomps.

If you are a worker and not an executive, you are not to be bound to any old noncomp nor to any noncomp imposed after the effective date of the Rule.

If you are an executive so defined, you can in many but not all circumstances be bound to noncomps you signed prior to the effective date; but even this group cannot be made party to a binding noncomp entered into after the effective date of the Rule.  The only difference is that executives prior to the effective date can be held after the effective date to those old noncomps.

This suggests employers today may be rushing to get noncomps from people who are executives under the Rule, if not already so bound.

Sales of businesses create one potential set of complexities.  It is often demanded by company purchasers that executives, founders and owners of corporations, or partners in a business being sold, enter into a new noncomp so that the business being purchased cannot be harmed by a person affiliated with the seller.  Here new noncomps can be obtained and enforced, in the future, against 25% shareholders (who presumably are being amply paid to stay away from competition).  Historically,  many lesser owners and employees were asked to sign non-comps in connection with an acquisition.

Impact on VC investments is interesting; VCs often seek noncomps from key workers and from defined executives before they invest.  Not getting such protection increases perceived risk to investors; will increased risk depress acquisition prices?

There may be issues for founders no longer employed.  Can an investor demand that a founder with <25% of the company who is not employed sign a noncomp?    Can an acquiror?  The Rule is supposed to protect only employees.

Seems in partnerships each partner may be deemed an employee?  What if a partner is a <25% owner (be careful how that is defined in the partnership documents) and is just an owner and not employed?

Impact on joint venture arrangements?  More an anti-trust issue?

Let us say someone is an executive as defined in the Rule, has an employment agreement with an embedded noncomp, the Rule becomes effective but the term of the employment agreement is running out–if the parties extend the term, is that deemed as to the noncomp an unenforceable new agreement?  What if the agreement self-renews every few years unless one party sends a notice of termination?

What about a separation agreement for any employee newly entered into that provides new compensation for a noncomp?  So-called garden party noncomps for which someone is paid?  They are being paid during the term of the arrangement, the person is “employed” and is not thereafter prohibited from competing. Seems okay?

Seems that normal accoutrements to basic noncomps will remain enforceable: protection of trade secrets and proprietary information, bans on hiring employees.  There is risk that some broader styles of articulating trade secret protection may constitute a de facto illegal noncomp, however:  what about a clause that says that trade secrets includes anything learned by the employee during the employment that could enhance a competitive effort?

There is a lot of law to be made if this Rule survives.  And if the Rule is killed now, and the Congress adopts anything like it (which may be unlikely), hopefully that law will address various scenarios with clarity or charge a committee to institute clear guidance in a wide variety of circumstances.

Sorry for reminder but it is super-important that readers understand this is NOT legal advice.  Take no action based on this post–see your friendly neighborhood lawyer.