(September 14, 2023) North Carolina and South Carolina each recognize the validity and enforceability of non-compete agreements in an employment context. Bray & Long’s corporate clients routinely incorporate non-compete clauses into their employment agreements along with other restrictive covenants such as customer non-solicitation clauses.
However, recent scrutiny into non-compete agreements by the Federal Trade Commission (FTC) may undermine years of legally-tested validity and dramatically change the ability of employers to protect their business interests against post-employment competition by former employees.
In summary, the FTC is currently reviewing noncompete agreements to determine whether they violate Section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition. In January 2023, the FTC proposed a blanket rule that would ban employers from imposing non-competes as a condition of employment. The agency received over 9,000 public comments on the proposed rule, both in favor and against it.
The FTC is currently reviewing the public comments and considering whether to finalize the proposed rule. If the rule is finalized, it would go into effect after a 60-day public comment period. The FTC could also decide to modify the proposed rule or abandon it altogether.
The proposed rule would apply to all non-compete clauses within the context of employment (as opposed to those conditioned on the sale of a business), regardless of the employee’s position, level of compensation, or industry. The rule would also apply to existing non-compete clauses, meaning that employers would be required to rescind those currently in force.
There is significant opposition to the proposed rule from businesses and industry groups. Businesses argue that non-compete clauses are necessary to protect their trade secrets and intellectual property. They also argue that the rule would make it more difficult for businesses to recruit and retain top talent.
The FTC is expected to issue a final rule on noncompete clauses in the coming months. The final rule is likely to be challenged in court, so it is possible that the issue will not be resolved for several years.
Businesses should generally be aware of this ongoing issue and understand that, like employers in California where non-competes are already unlawful, they may need to anticipate a reality where certain ex-employees will directly compete against their interests from the first day following the termination of their employment.