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.
What is the FTC non-compete rule?
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.
Impact of the FTC non-compete rule on management liability
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:
- Trade secret misappropriation litigation: Companies may see an uptick in lawsuits alleging former employees are misusing confidential information.
- Increased breach of contract claims: Disputes may arise over the enforceability of non-solicitation or confidentiality agreements that regulators could consider informal non-competes.
- Employment practices liability (EPL) claims: Employees may file claims alleging the company's response to the rule violated their rights, such as claims for failure to promote or deprivation of career opportunities.
The role of directors and officers insurance under new FTC regulations
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:
- Increased litigation risk: Trade secret misappropriation, breach of contract claims, and even class action lawsuits by employees alleging new rule violations.
- Regulatory scrutiny: Investigations and enforcement actions by the FTC or other agencies related to non-compete practices.
- Defense costs and expenses: Individual officers and directors are financially covered during an investigation (you’ll need a professional liability and general liability policy to cover business/non-individual expenses).
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.
Act today in preparation for the FTC rule
In addition to comprehensive management liability insurance, you can prepare for the FTC non-compete rule by:
- Reviewing agreements: Scrutinize existing and new employment contracts for any provisions that could be considered non-competes, including non-solicitation and confidentiality clauses.
- Strengthening protections: Update or create robust confidentiality and non-solicitation agreements that comply with the FTC rule while safeguarding trade secrets and other proprietary information.
- Developing alternatives: Explore alternative strategies for protecting your business interests, such as focusing on employee retention programs and fostering a positive work environment.
- Preparing for compliance: When the rule takes effect, be ready to:
- Cease using non-competes in future agreements.
- Identify current and former employees bound by existing non-competes and notify them that these agreements are no longer enforceable.
Vigilance in a highly regulated environment
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.
Want to learn more?
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Connect with the Risk Strategies Management Liability team at MLPG@risk-strategies.com.
