August 14, 2024
![Management Liability Insurance in the Wake of the FTC Noncompete Rule](https://www.risk-strategies.com/hubfs/Non-compete%20Contract.jpg)
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The Federal Trade Commission's (FTC) ban on non-compete agreements will upend traditional employment practices, affecting a wide swath of employers, employees, and legal professionals. As this landmark rule takes effect in September, employers will need to navigate a new landscape with redefined talent retention strategies and legal considerations. This shift also highlights the growing importance of management liability insurance in safeguarding your company and its leadership in a time of rapidly emerging risks.
Finalized in April 2024 and slated to take effect on September 4, 2024, the FTC's ban on non-compete agreements is rooted in the agency’s determination that they constitute an unfair method of competition, harming both workers and markets. By restricting labor mobility and stifling innovation, non-compete agreements were found to suppress wages, hinder new business formation, and potentially lead to higher consumer prices.
The new FTC non-compete rule aims to foster competition, increase wages, and encourage innovation by allowing employees greater freedom to change jobs and pursue new opportunities. The new rule bans employers from entering into new or enforcing existing non-compete agreements with most workers after the rule's effective date.
The rule does have limited exceptions, such as for non-competes executed during the sale of a business and for certain high-earning executives. Still, it represents a significant shift in the legal landscape for employment agreements.
In banning most non-compete agreements, the FTC rule has a number of far-reaching implications for businesses like yours. Those implications include new legal challenges, such as:
The new FTC rule could lead to class action lawsuits against company directors and officers. A lawsuit might allege, for instance, that a company enforced non-compete agreements, even unintentionally, that are now invalid, potentially violating state or federal laws. D&O insurance protects the personal assets of directors and officers from claims alleging wrongful acts committed in their capacity as company leaders.
D&O insurance reimburses the defense costs incurred by board members, managers, and employees in defending against claims made by shareholders or third parties for alleged wrongdoing. D&O insurance also covers monetary damages, settlements, and awards resulting from such claims.
With the FTC's ban on most non-competes, D&O insurance can safeguard against:
The FTC rule highlights how quickly the legal landscape can change. D&O, employment practices liability (EPLI), and other types of management liability insurance provide a buffer against unforeseen risks and liabilities that may emerge.
In addition to comprehensive management liability insurance, you can prepare for the FTC non-compete rule by:
As your business navigates the complexities of the post non-compete rule landscape, the right management liability insurance becomes an indispensable asset. By mitigating legal risks, it empowers your company and its leadership to concentrate on what matters most — expanding and driving innovation.
Find Donovan on LinkedIn.
Connect with the Risk Strategies Management Liability team at MLPG@risk-strategies.com.
The contents of this article are for general informational purposes only and Risk Strategies Company makes no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information contained herein. Any recommendations contained herein are intended to provide insight based on currently available information for consideration and should be vetted against applicable legal and business needs before application to a specific client.