With the proposed US Federal Trade Commission (FTC) ban on non-compete clauses set to take effect on 4 September 2024, lawyers said China companies operating in America will need to ensure compliance.
Employment agreements with non-compete clauses restrict employees from working at rival companies or establishing new firms.
The FTC said the ban on non-compete clauses was aimed at promoting the establishment of new companies and protecting US workers’ freedom to change jobs.
When the ban takes effect on 4 September, workers except for senior executives will no longer be bound by their existing non-compete agreements. The FTC said senior executives were individuals in policy-making positions who earned more than USD151,164 annually.
Employers, meanwhile, are barred from entering into any new non-compete agreements.
Michael Jones, a Houston and Dallas-based partner at Morgan Lewis, said when the ban takes effect, it will likely result in easier employee mobility with substantially fewer litigation claims over technical breach of contracts.
“Employers can continue to safeguard their interests through appropriately tailored confidentiality agreements and non-solicitation agreements and, in some cases, through properly drafted garden leave provisions,” said Jones, who is also Morgan Lewis’ co-leader of the trade secrets and unfair competition task force.
Jones added that the ban would not necessarily create any immediate consequences as the FTC published the proposed ban on 7 May, and it would take around four months to take effect.
As many companies from China and other Asian regions have set up enterprises in the US, lawyers say some will need to comply but others may be exempt.
Lesli Ligorner, managing partner of Morgan Lewis’ Shanghai office, suggested that regardless of where the company is based, the ban applies to workers and businesses operating within the US. However, there are exceptions.
“The ban does not apply to non-competes if they restrict work outside the United States, however. As a result, a Chinese company will still be able to prohibit its US-based employees from competing against it overseas,” Ligorner said.
Jessica Mendelson, an of counsel at Paul Hastings, said certain sectors were excluded from the ban.
“The exceptions include non-profit entities as well as certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons subject to the Packers and Stockyards Act of 1921, which sit outside the scope of the FTC Act.”
The purpose of the Packers and Stockyards Act is to ensure fair competition in America’s livestock industry.
Ligorner advised China companies not to do “anything drastic” until there is further guidance from the US. However, they can begin taking an inventory of existing agreements that may need to be amended and paying heed to impacted workers.
“Employers will also still be able to use appropriately tailored confidentiality agreements and non-solicitation agreements,” she added. “Employers should always remain focused on protecting their confidential, proprietary, and trade secret information through reasonable measures under the circumstances.”
Around 18% of US workers or 30 million people are covered by non-compete clauses, according to the FTC.
