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FTC Noncompete Agreement Ban May Not Survive Courts but Some States Could Adopt

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The Federal Trade Commission’s recently approved ban on noncompete agreements likely won’t survive court challenges, but that doesn’t mean the ban won’t become a model for a number of state legislatures to follow in coming months.

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“We don’t see it going away,” said Diana Estrada, an employment law attorney and partner with the Wilson Elser law firm. “We see the FTC action as a blueprint for other states.”

Estrada

Estrada spoke Monday at the Target Markets Program Administrators Association’s Mid-Year Meeting in Tampa. She noted the rule is set to take effect Sept. 1 if it is not halted by court rulings. If it stands, or if more states laws are crafted, the ban will create new headaches for many businesses—including insurance agencies, carriers, program management firms and others in the industry, the panel members agreed.

After the FTC on April 23 announced the ban on non-compete agreements, three organizations, including the U.S. Chamber of Commerce, quickly filed suit, arguing the rule is too broad for an executive branch agency and is not backed by a mandate from Congress.

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Whether the ban stands, some type of agreement on poaching-limits can be quite valuable, as well as other types of mechanisms available, the panelists pointed out. Non-solicitation agreements (NSA), which generally ban workers from raiding former firms of employees, vendors and clients, would not be barred under the FTC rule, Estrada said.

So-called “garden leave” agreements also have not been hit by courts and regulators. These allow employers to keep a former worker “employed”—on the payroll for a period of time, usually up to 90 days. But the worker can be barred from having contact with others at the former firm during that period.

“That’s a strong tool to have,” Estrada said.

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Chris Pesce, national programs practice leader with One80 Intermediaries, a wholesale and specialty brokerage, noted that non-solicitation agreements have proven to be the most enforceable and can make a selling company more valuable to a buyer. Buyers are likely to pay more for a company knowing that the book of business is not at risk of being poached by departing employees, he said.

“In acquisitions, we will pay more for protections of forward earnings,” said Matt Sackett, CEO of Doxa Insurance Holdings.

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That is achieved through actual agreements for most workers, not simply a mention of a NSA in the employee handbook, the panelists agreed.

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