Non-compete & Non-solicit Provisions
The attorneys at Outten & Golden negotiate and draft non-compete and non-solicit provisions so that our clients—executives, partners, or professionals—are protected from unfair restraints on their careers in the future. We focus on protecting our clients’ rights while allowing them to fulfill their obligations to the businesses they lead. We strongly encourage our clients not to sign or agree to any restrictions on their employment without consulting with our team. Consulting with our lawyers before, not after, employment begins can often prevent problems.
Restrictive Covenants
Non-compete and non-solicit provisions in contracts, often called restrictive covenants, are restrictions on an individual’s employment or partnership both during employment with a particular employer and after that employment ends. These restrictions can prevent an executive, partner, or professional from working in his or her own industry for a period of time after employment ends, or from soliciting employees, clients, or customers after leaving employment. In some cases these restrictions can also prevent an individual from starting a new business and from hiring former employees.
These covenants are often in employment agreements but are also found in equity agreements, stock and option grants, and in employee handbooks. They can also be stand-alone agreements that are signed before and often during employment without an opportunity to consult with counsel. In addition to written contract provisions, some states have laws that define and enforce restrictive covenants even without a written agreement based on common law duties of employees and executives such as the duty of loyalty or fiduciary duties.
Non-compete and Non-solicitation Disputes
If a dispute arises concerning a non-compete or non-solicitation provision, an employee, executive, partner, or professional can wind up as a defendant in a court action seeking an injunction or a temporary restraining order, which could prevent that individual from working for a new employer or opening a new business or practice; he or she could also be sued for breach of contract. These actions can be very costly and can happen immediately upon a suspected breach of restrictive covenants. Consulting with our attorneys before, not after, these potential breaches occur can often head off this kind of lawsuit.
Our attorneys in the Executives & Professionals Practice Group have expertise in restrictive covenant laws both nationally and internationally and lecture frequently on this subject. They have published numerous articles and, most recently, a book on the subject of international restrictive covenants and trade secrets.
What The Proposed FTC Ban on Noncompete Clauses Could Mean for Real Estate Brokers
The FTC made headlines last month when it announced its Proposed Non-Compete Clause rule, which would render unenforceable and void non-competes nationwide. While the press and FTC have provided examples of the use of such clauses in the context of security guards and sandwich-makers, there is scant information available on how the proposed rule would impact agreements in the commercial real estate industry, where contracts with brokers and executives are paramount to setting the parties’ compensation terms both during the relationship and after it ends.
While non-competes have not historically been included in in agreements with qualified real estate agents, their use has grown more common in recent years as large brokerage firms have consolidated the market. The use of non-competes in this context are exactly what the FTC is attempting to protect, as it results in less competition, driving down the rate of compensation for brokers and decreasing options for clients and investors. Further, senior brokers and executives of brokerage firms may be granted equity or quasi-equity compensation that is tied to a non-compete provision, which it particularly challenging for them to move between firms.
Below are a series of answers to frequently asked questions by brokers and executives in the commercial real estate industry who are trying to make sense of the FTC’s proposed rule and its impact on their current and future obligations.
Frequently Asked Questions
The proposed rule, if adopted as drafted, would ban all future non-competes that apply post-employment or post-engagement and require firms to rescind all existing non-compete provisions that apply following the conclusion of an employment or contractor relationship by issuing a notice of rescission to each impacted worker
Likely, yes. The FTC’s rulemaking authority applies broadly to many types of employers, including commercial real estate brokerage firms and their subsidiary and affiliated entities. Importantly, the rule extends beyond employees – it applies more broadly to all workers, including independent contractors and qualified real estate agents, who are often paid on a 1099 basis. This is a huge step forward from state legislation on non-competes that was focused primarily on prohibiting non-compete clauses in the employment context, but frequently failed to extend those protections to independent contractors.
Many brokerage firms induce qualified real estate agents to work for a fixed term of years by providing them with a contract for that period of time and an accompanying forgivable loan that is subject to achievement of time and performance-based measures. These agreements will not be impacted by the proposed rule, which applies only to post-engagement restrictions and which are not tied directly to competition. QREAs who have these types of agreements or are being asked to sign such agreements should consult with counsel to determine their contractual rights and obligations under these agreements.
Potentially no. The FTC’s commentary to the proposed rule has an exception for non-competes entered into the sale of the business, with a threshold of 25% ownership of the sold entity. For those sellers whose percentage interest was below that threshold non-competes would no longer apply. This is particularly common in the CRE industry where larger brokerage firms have acquired talent not only through individual contracts, but also corporate acquisitions. Our Executives and Professionals Practice Group has extensive experience representing individuals and executives in the courts of M&A transactions. We assist individuals to ensure they are getting the appropriate protections and compensation in the course of such a deal.
Very likely, yes. The proposed rule expressly states that it does not apply to garden variety non-solicitation provisions or provisions prohibiting the disclosure of confidential information. However, non-solicitation restrictions that are drafted so broadly that they would prohibit an individual from working for any competitor, could be considered a de facto non-compete in violation of the rule.
Yes, the proposed rule would apply retroactively. However, if the non-compete is part of a larger agreement, the rest of the terms in that agreement would still be applicable. So, for example, the non-compete in a commission plan may be rescinded but the brokerage firm would still be obligated to pay any commissions promised under that agreement.
The FTC’s proposed rule has not yet gone into effect, and it may be significantly altered by the rule-making process. Individuals should continue to abide by their existing restrictions. However, your non-compete may be unenforceable under the laws of the state in which you reside and work or that govern the agreement. Many states have enacted legislation in the past 10 years that severely limit the use of non-competes, although not all extend those protections to independent contracts. Even so, non-competes have long been subject to judicial scrutiny. We suggest you consult with counsel to understand the scope of your contractual obligations and their enforceability. The attorneys in our Executives and Professionals Practice Group are seasoned advisors on how to understand, navigate and challenge your existing restrictive covenants.
It could be. As stated above, the proposed rule has not yet gone into effect, and it may be substantially altered. Brokers and executives should not sign onto non-compete agreements under the assumption that they will soon be unenforceable. If you have been asked to sign a non-compete agreement, we suggest you consult with counsel to understand its scope and enforceability, and to seek assistance in negotiating its terms.