No More Non-Competes?

Non-competes—restrictive covenants in which one party agrees to refrain from competing with another—have long been enforceable in Nevada, even in the healthcare field, so long as they are reasonably necessary to protect the legitimate business interests of the beneficiary of the non-compete and do not contravene the public interest. See Ellis v. McDaniel, 95 Nev. 455, 459, 596 P.2d 222, 225 (1979); see generally NRS 613.195. Consequently, non-competes are a relatively common tool used by Nevada businesses seeking to protect their business interests against competition from former employees.

In recent years, efforts have been made, in Nevada and elsewhere, to limit non-competes. For instance, NRS 613.195 has been amended to impose limitations on non-competes, including the prohibition of non-competes for workers paid an hourly wage. See generally NRS 613.195. In 2023, the Nevada Legislature passed AB 11, a bill that would have prohibited non-competes between hospitals and medical providers, but it was vetoed by Governor Lombardo.

The FTC rule

In April 2024, the Federal Trade Commission (“FTC”) issued a final rule that prohibits—nationwide—most non-competes for employees (the “Rule”). See 16 CFR § 910 (2024). The Rule is scheduled to become effective on September 4, 2024 (the “Effective Date”). Once effective, employers must provide notice to their employees that their non-competes, except those that fall within the Rule’s exceptions, are no longer enforceable. Id. § 910.2(b).

The Rule includes only entities and activities that are subject to the FTC’s enforcement jurisdiction. For instance, banks and non-profits may not be subject to the Rule. See generally Non-Compete Clause Rule, 89 Fed. Reg. 38342, 50-54 (May 7, 2024). Moreover, the Rule includes some limited exceptions. It does not apply to:

• Non-competes with senior executives existing prior to the Effective Date. However, no new non-competes with senior executives are permitted after the Effective Date. A “Senior Executive” is a worker in a policy-making position whose total annual compensation is at least $151,164.00. 16 C.F.R. § 910.1.
• Non-competes “entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”
• “A cause of action related to a non-compete clause accrued prior to” the Effective Date. Id. § 910.3(a)-(c).

Beyond its limited exceptions, FTC guidance indicates that the Rule does not inhibit the enforcement of intellectual property rights, including trade secret laws. The Rule also does not prohibit reasonable non-disclosure/confidentiality agreements, non-solicitation agreements, invention assignment agreements, or “garden leaves” that do not act as de facto non-competes. (A “garden leave” is an arrangement in which the worker technically remains an employee for a period of time, does not work during this period, but continues to be compensated).

The Rule will effect a significant change to the employment law landscape if it goes into effect. At the time of this writing, the Rule is subject to numerous legal challenges. At least one court has issued a preliminary injunction enjoining its enforcement against the plaintiff in that action while another court has denied a similar request for preliminary injunction. Compare Ryan LLC v. FTC, 2004 WL 3297524 (N.D. Tex. July 3, 2024) with ATS Tree Services, LLC v. FTC, 2024 WL 3511630 (E.D. Pa. July 23, 2024). Expect more to come on the legal front.

Suggestions given recent trends, including the FTC rule

Given the Rule, employers should immediately evaluate existing non-competes. And, whether the Rule survives legal challenge, recent legislative and regulatory hostility towards non-competes should serve as a cue to employers to implement or shore-up other avenues to protect their legitimate business interests.

Employers should implement or reassess policies, procedures, and agreements concerning the protection of confidential and proprietary information. Without non-competes as an option for employers to protect their business interests against competition from former workers, trade secret law may become of heightened importance; an essential element of a claim for misappropriation of trade secrets is that the employer undertook efforts reasonable to maintain the secrecy of the information. See NRS 600A.030(5).

In addition, employers should consider, where appropriate, implementing or reassessing existing non-solicitation agreements and invention assignment agreements. Moreover, employers should consider whether garden leaves make business sense in appropriate circumstances.

Given recent legislative and regulatory scrutiny of non-competes, failure by businesses to explore other means of protecting their interests could lead to competitive disadvantages.

This article was originally published in the September 2024 edition of the COMMUNIQUÉ, the official publication of the Clark County Bar Association.