Does the Federal Trade Commission’s (FTC) ban on non-compete clauses apply to non-solicitation clauses?
It depends. The FTC ban on non-compete clauses can apply to non-solicitation agreements. However, only those that are so broad that they function as a non-compete clause by preventing the worker from, or penalizing them for, seeking or accepting other work or starting their own business.
First, How Does the FTC Define “Non-Compete Clause”?
A non-compete clause under the FTC’s “non-compete clause final rule” is defined as “a term or condition of employment that either ‘prohibits’ a worker from, ‘penalizes’ a worker for, or ‘functions to prevent’ a worker from:
- seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
- operating a business in the United States after the conclusion of the employment that includes the term or condition.”
In using the phrase “functions to prevent,” the rule bans not only non-compete clauses but also other restrictive employment agreements, like non-solicitation agreements, if they expressly or functionally behave as a non-compete agreement.
When Might a Non-Solicitation Agreement “Behave” As a Non-Compete Agreement?
A non-solicitation agreement can behave like a non-compete agreement in some unintended ways.
Here are examples of non-solicitation agreements that may “function to prevent” a worker from seeking or accepting work elsewhere:
- Overly Broad Restrictions: A non-solicitation agreement that prevents a salesperson from contacting any client the company ever interacted with, regardless of industry or the salesperson's specific role. This could severely limit the salesperson's ability to find new employment, potentially functioning like a non-compete agreement.
- Highly Specialized Roles: In some cases, particularly with very specialized roles, soliciting clients or customers may be inherently tied to performing the job itself. For instance, a pharmaceutical researcher who works on a specific drug might be restricted from soliciting colleagues or clients to work on similar projects at a new company. While the agreement might be framed as non-solicitation, it could effectively prevent them from fully using their skills elsewhere, mimicking a non-compete clause.
The FTC declined to enumerate every circumstance in which the non-compete ban would apply. Instead, the commission states that gauging when a non-solicitation behaves as a non-compete agreement is a fact-specific inquiry, that must take into consideration the “circumstances of particular covenants and the surrounding market context.”
Are Non-Solicitation Agreements Categorically Banned by the FTC’s Final Rule on Non-Compete Agreements?
No, non-solicitation agreements are not outright banned by the FTC.
The FTC noted in its final rule that non-solicitation agreements “are generally not non-compete clauses under the final rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business.”
The FTC ban would only prohibit those non-solicitation clauses that are “so broad or onerous that it has the same functional effect” as a term or clause that “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”
Enforcing Non-Solicitation Agreements After the FTC Ban
Given the lack of absolutes, the potential for more – and more costly – litigation over restrictive employment agreements, including non-solicitation agreements, is high.
The FTC considered comments during the rulemaking process that alleged the FTC’s non-compete definition was overinclusive and vague, saying “such covenants would be subject to case-by-case adjudication for whether they constitute an unfair method of competition even in the absence of the final rule.”
In other words, the enforceability of a non-solicitation agreement was dependent on the facts and circumstances of a particular agreement and the surrounding market before the final rule and will likely continue to be so after (or if) the FTC ban becomes effective.
Before you alter or consider altering the provisions of your employment agreements to adapt to the FTC’s final rule on non-compete agreements, speak to your business attorney at Hendershot Cowart P.C. Similarly, do not assume or communicate to employees that the ban will be effective on September 4 (the final rule’s scheduled effective date).
The FTC ban on non-compete provisions (and non-solicitation agreements that function as a non-compete) is not yet effective, and challenges to the ban may result in changes to its current form.
Our law firm is following this issue closely and can advise you of the latest developments.
Concerns about the enforceability of your employment agreements or the protection of your critical trade secrets? Call (713) 909-7323 to schedule a consultation today.
