Hartford Business Journal

8 HARTFORDBUSINESS.COM | MAY 13, 2024 Politics & Policy The Federal Trade Commission's decision to ban noncompete agreements has created uncertainty for Connecticut employers. PHOTO | ADOBESTOCK 'Restrictive Covenants' With legal battle ahead, CT employers urged to use caution following FTC's noncompete-agreements ban By Skyler Frazer sfrazer@hartfordbusiness.com W ith the Federal Trade Commission's (FTC) recent ruling to ban most forms of noncompete agreements between employers and workers, employment lawyers say Connecticut businesses should be cautious about using such clauses in existing contracts, even if legal challenges to the decision are coming. The FTC in April voted 3-2 to ban most U.S. employers from forcing workers to sign noncompete agree- ments, arguing the move will increase innovation and foster new business formation. FTC Chair Lina M. Khan said noncompete clauses "keep wages low, suppress new ideas, and rob the American economy of dynamism." In its ruling, the federal agency esti- mates 30 million workers — nearly one in five Americans — are subject to a noncompete clause, which typi- cally adds contractual conditions that restrict workers from taking a new job at a competitor or starting a new business if they leave an employer, according to the FTC. The trade commission said banning noncompetes will lead to a 2.7% annual increase in new business formation, $524 annual pay bump for the average worker and more patents issued each year to entrepreneurs. Critics, though, said the decision amounts to federal overreach. The U.S. Chamber of Commerce has already filed a lawsuit in Texas over what it called an "unlawful" ban, and Connecticut Business & Industry Association President and CEO Chris DiPentima said the FTC deci- sion sets a "dangerous precedent" that could harm employers, workers and the country's economy. Regardless of the upcoming legal challenge, employment lawyers said Connecticut business owners should take the opportunity to assess how and when they use noncompetes, and whether they're necessary or even valid. "Don't panic and bring out the paper shredder, but give some serious thought to whether or not your noncompetes are reasonable," said Salvatore G. Gangemi, a partner at law firm Murtha Cullina LLP and a veteran labor and employment attorney. "Some of the noncompetes that these companies are using are 20 years old or even older, so they haven't given it much thought. Times have changed and courts are less inclined to enforce them than before." Will ban 'ever take effect'? Under the FTC's decision, existing noncompetes for the vast majority of workers will no longer be enforce- able after the rule's effective date, which is at least four months away. Existing noncompetes for senior executives, identified as employees in policymaking positions with annual salaries above $154,161, can remain in force, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives, the FTC said. Employers will be required to notify non-senior executives that existing noncompetes will not be enforced, the FTC said. But the chamber's lawsuit in Texas federal court will likely delay imple- mentation of the FTC's ban, said Daniel A. Schwartz, a partner and employ- ment lawyer at law firm Shipman & Goodwin LLP. "That jurisdiction has shown a propensity for issuing nationwide injunctions against Biden admin- istration rulings, so it seems likely that the court (in Texas) will issue an injunction to allow the parties more time to debate the rule without it going into effect," Schwartz said. "I've been telling employers be cautious, be mindful, but don't assume that this rule is actually going to go into effect in four months. We're still a long way from that." Schwartz said the main argument by the ruling's critics is that the FTC is overstepping its jurisdiction and "making law instead of interpreting the law." Some believe these deci- sions should be left up to Congress, Schwartz said. The FTC's argument, Schwartz added, is that noncompetes inher- ently impede trade and the move- ment of workers, and are often abused by employers to protect their own business. He used an example from several years ago when restaurant chain Jimmy John's included noncompete clauses in contracts with its sandwich makers, which the company later rolled back after critics called it an overstep of such agreements. "I think that's the battle that's going to be fought out in the courts, and I think it's going to take some time to do so because we really haven't seen (the FTC) get that involved on noncompetes before," Schwartz said. While the ruling is new, the FTC has been exploring changes to noncompete clauses for several years, and it was "just a matter of time" before a formal ruling came out, Schwartz said. Noncompetes have become more common over the last 20 years, he added. Gangemi, the Murtha Cullina employment lawyer, said he thinks the FTC's ruling will lose a court battle. "I don't think the rule will ever take effect," he said. "I don't believe the Federal Trade Commission has the authority to basically ban all noncom- pete arrangements. I think in this case, they went too far." Employers should be ready While the legal battle over the FTC's ruling is underway, Schwartz Daniel A. Schwartz Salvatore G. Gangemi

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