Non-Competition Clauses in North Carolina
Wondering whether the FTC’s proposed rule alters the non-compete agreement you or your business signed? The short answer is not yet, but you may still want to prepare for what is around the corner.
On 5 January 2023, the Federal Trade Commission (“FTC”) proposed a rule to ban non-competition clauses from employment agreements. The proposed rule, published on 19 January, “would provide it is an unfair method of competition—and therefore a violation of Section 5 [of the FTC Act]—for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or, under certain circumstances, represent to a worker that the worker is subject to a non-compete clause.”
The FTC’s proposed rule seeks to define the term “non-compete clause” as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with employer.” The crux of whether a particular contract provision is a non-compete under the FTC’s proposal is the functionality of that provision rather than the name given to a clause.
While the FTC touts that non-compete clauses harm workers and competition, as with most issues, there are two sides to the story. Employers may be motivated to use non-compete clauses if, for example, seeking to retain specialists in an area where there is a lack of available talent, maintaining confidentiality, or benefiting from an investment made by the business in the employee’s education. Commissioner Wilson outlined several other concerns in her dissent from the proposed rule, including potential harm to clients linked to suspending non-compete provisions.
As part of the administrative law process, the proposed rule is open to comment from the public until 20 March 2023. The FTC’s final version of the rule may look different than the proposal, and it is difficult to speculate as to what exactly might be different in the final rule. If the FTC does move forward with its final rule to seek to ban non-compete clauses, that rule will almost certainly be challenged in the courts. In practical terms, whether non-compete clauses are, or can be, banned by a federal agency is a question that will likely not have a definitive answer for a few years.
While the country-wide state of non-competition agreements is clarified, we will continue to monitor how the courts in North Carolina approach non-compete agreements. Currently, the enforceability of non-compete clauses varies by state. Several states already have made non-compete clauses unenforceable on public policy grounds. North Carolina has not banned non-compete clauses but subjects the clauses to a high level of scrutiny and mandates that the clauses are “reasonable as to time and territory.” North Carolina’s inquiry is fact-specific, and thus, may accept or reject varying non-compete provisions depending on the wording of the contract and underlying facts of each case. North Carolina also already has a similar practice to the FTC proposal in addressing the functionality of a contract provision that serves the purpose of a non-compete clause, even if the contract refers to that clause as something else.
That is not to say that North Carolina businesses are left with limited options to protect their legitimate business interests. For example, in Faidas, the North Carolina Supreme Court affirmed a decision by the Court of Appeals of North Carolina which considered whether a liquidated damages clause was simply a non-competition clause by another name. The Court of Appeals reasoned that the provision at issue in Faidas did not prohibit the employee from engaging in her profession. Rather, the provision established that if the employee chose to engage in her profession within a limited geographic area, she would agree to pay the employer a certain sum of money for doing so. The Court of Appeals also disagreed that the sum of money constituted a penalty. Faidas presents only one example of how a business might protect some of its interests. On its face, it does not appear that Faidas would run afoul of the FTC’s proposed rule, but we caution again that an analysis with the final rule may be different. We also caution that a new rule might bring new challenges to existing case law.
The best action for businesses now is to review their current employment contracts and assess potential risks and alternative measures to protect goodwill, clients, contracts, and investments.
If you have questions about the FTC’s proposed rule, non-compete clauses, or this blog post, please contact us at (828)252-5555.