By Michael J. “Mick” McGirr, Esq. | Phocus Law
On April 23, 2024, the Federal Trade Commission (FTC) finalized a rule banning non-compete clauses in employment contracts. This significant change, to become effective 120 days after the rule is published in the Federal Register, which is to occur in August 2024, impacts how businesses protect their interests. The purpose of this article is to provide some quick insight into the rule and what you can do to protect your interests in light of this rule change.
Understanding the New Rule
The FTC’s rule prohibits employers from using non-compete clauses, rendering existing agreements unenforceable and barring new ones. This shift is crucial for real estate investors and business owners who have relied on these clauses to safeguard their competitive advantage.
Implications for Your Business
For Arizona-based real estate investors and business owners, the ban on non-compete clauses necessitates exploring alternative protective measures. While non-competes provide security, effective alternatives exist to maintain your business edge. In fact, for the past few years, Phocus Law has been instructing clients to rely less upon the court’s fickle enforcement of non-competes, and has instead, instructed, and assisted clients in protecting their interests through means that are more directly targeted at protecting the customers and information that is most valuable.
Effective Alternatives: Non-Solicit and Confidentiality Agreements
Non-Solicit Agreements: A properly drafted non-solicit agreement effectively restricts employees, both during their employment with your company and after, from soliciting your company’s clients, customers, or other employees or essential business relations. By utilizing a non-solicit, you ensure that employees and/or former employees do not take the essential business relationships you work so hard to develop with them when their employment is over. A non-solicit can restrict a former employee from contacting your customers, from marketing directly to your customers, from interfering with your supplier or vendor relationships in a manner that would diminish your company’s relationship with those vendors, and so much more.
Confidentiality Agreements: A properly drafted confidentiality agreement protects your company’s sensitive information from being improperly used and from being disclosed to competitors or the public. By utilizing a confidentiality agreement, you can ensure for your business that your valuable proprietary information, trade secrets, client lists, and potential client lists, developments, and business strategies remain confidential, allowing your company to be the sole party to benefit from those pieces of information you have worked so hard to develop.
Adapting to the New Rule
It will be necessary for you to cease relying upon non-compete agreements to ensure compliance with the new FTC rule. However, the alternative mechanisms for protecting your interests, as described above, are more effective and will more durably stand up to scrutiny from courts if challenged. Identifying the types of relationships and information that are most valuable to your business, and then protecting those with non-solicit and confidentiality terms, will ultimately benefit your business just as much, if not more, than having non-compete terms in place.
For many years, Phocus Law has been helping businesses protect their relationships and information from parties that may try to usurp it, including former employees. We would be happy to assist you in doing the same. We can be reached by email at Mick@PhocusCompanies.com or by phone at (602) 457-2191.