How the FTC’s Ban on Non-Compete Agreements Could Unravel Your Estate Plan

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The Federal Trade Commission (FTC) established its final version of a rule that bans nearly all non-compete agreements. It passed on April 23. It means that most agreements of this type are no longer allowed, and it will also ban almost all agreements already in place.

The ruling will change a lot of employees’ relations with their employers, which includes independent contractors. Once the rule becomes effective on Sept. 4, agreements that already exist cannot be enforced, and new contracts cannot be made. Some exceptions to these hard and fast rules do exist.

Senior Executives not Affected by Ruling

The individuals it will not affect are senior executives. These individuals, if they are under a non-compete agreement, are defined as someone who is given a total compensation of at least $151,164 in the previous year (excluding fringe benefits) and is in a policy-making position.

People Affected Must Be Notified

The FTC also requires that employers notify all people affected by it. Employers must contact them in person, through email, texts, or in writing—if they have any contact information. The notification must state that the non-compete agreement cannot be and will not be enforced against the employee.

Nondisclosure Agreements, Non-Solicitation Agreements, and Repayment Agreements

These agreements that an employee may be required to sign are not under the new rule because they deal with different matters. They are illegal if they contain clauses with the same type of provisions that a non-compete agreement would have. State law may also affect these documents.

One of the reasons for this ban is that the FTC believes this new rule will bring an economic boon to the country. They estimate that 18 percent of workers in the United States are under non-compete rules. They also think there will be more than 8,500 new business start-ups each year, more than 17,000 new patents, and employees will earn an additional $524 annually.

Under a non-compete agreement, employees often have their hands tied and their options very restricted. Some are not allowed to work elsewhere, others cannot work at a similar job even after leaving their present employer, and they often are not allowed to start a new business. These agreements are also used in many other ways to hinder employees from doing various things and earning better salaries.

Three Situations Where the Rule Does Not Apply

Besides not applying to senior executives, JDSupra gives three more situations when the rule does not apply. First, it is not applicable after a business is sold. Secondly, if a cause of action (a lawsuit) has ensued, the legal proceedings may continue. And thirdly, someone can enter an agreement or enforce one where they have good reason to believe that the final rule does not apply.

Protecting Trade Secrets

One of the things that a non-compete agreement has done in the past is to protect trade secrets. CNN reports that the FTC argues that where confidential information needs to remain that way, a confidentiality clause can accomplish it.

How It Applies to Estate Planning and Business Succession

One place where the absence of a non-compete agreement could cause a problem is when a business owner wants to pass it on to their heirs before they die. Naturally, if the business is successful under its leadership, the owner would want it to continue to do so.

The concern in these cases is that once you divulge the confidential matters of your business to certain heirs, there is always the question of what they might do with it and its secrets. They could sell it, start their own new business using your secrets, or sell your secrets and let it die.

Without a non-compete agreement, you have essentially lost control of your business and its secrets. With a non-compete agreement, you could safely entrust your desired new family business leaders with your business secrets, and you would likely want to guarantee that they stay as key personnel for several years while you train them.

Assuming they follow the agreement, they could not start a new competing business. Without the agreement, you may be out of luck unless your estate planning lawyer can find a similar way to ensure business succession planning without a non-compete contract.

The Exception in a Business Sale

When a sale of the business takes place, ShenkmanLaw says, or when an employee sells their business interests, it seems that the FTC thinks that the employee would feel compensated for their work. In that case, the employee is free of the non-compete clause.

Lawsuits Are Already on the Books

Several lawsuits have already been filed against the FTC and this rule. There are apt to be more. Some cases even question whether the FTC can make a rule that could affect one out of five employees and independent contractors.

One of the lawsuits comes from the U.S. Chamber of Commerce. Also, one of the five FTC commissioners objected to the rule because they thought it unlikely to pass legal challenges.

It is unknown if this new FTC rule will pass in its present condition or something vastly different. For now, it appears non-compete agreements may no longer exist for long. People concerned about business succession need to start talking to their estate planning lawyer to find new ways to protect their interests if it survives.

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