A new ban on NDAs means more burdens for corporate contracting professionals, but advanced AI can help alleviate that load.

On April 23rd, 2024, the Federal Trade Commission (FTC) announced a significant new rule that bans the use of non-compete agreements (NCAs) in the U.S. 

NCAs are contractual clauses that restrict an employee's ability to work for a competitor or in a similar role after leaving their current position. The FTC's new rule argues that they stifle competition in the labor market, ultimately harming both workers and the broader economy. 

A primary objection to the rule is that NCAs are used to protect legitimate trade secrets and confidential information, though the new rule doesn’t touch non-disclosure agreements (NDAs). As you’d expect, there are already challenges being raised against the rule; the U.S. Chamber of Commerce is already mounting a lawsuit.

What are the implications of this ruling for employers, especially those that may have a sizable volume of  NCAs in place?

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What are the specifics of the new FTC rule?

Here's a quick breakdown of the FTC's new non-compete rule:

Who's affected?

• Most employees (except senior executives making over $151,164 annually).

What's banned?

• Employers cannot enter into or enforce non-compete agreements with covered employees.
• Threatening or penalizing employees for refusing to sign a non-compete is also prohibited.

What's allowed?

• Trade secrets can still be protected with non-disclosure agreements (NDAs).
• Limited restrictions on soliciting specific employees for confidential information might be permissible.

Retroactive vs. prospective?

• Existing non-compete agreements (except for senior executives) are generally unenforceable.
• New non-compete agreements are banned for all covered employees.

Implementation timeline?

• The rule is effective 120 days after publication in the Federal Register (likely late August/early September 2024).

Caveats?

• Legal challenges could delay or overturn the rule. 
• State laws might add further restrictions.

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How does it impact legal ops and contracting teams?

One mandate within the new rule creates fresh headaches for them:

• Non-senior executives with non-compete agreements must receive notice within four months that their agreements will not be enforceable.

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How can customizable, AI-native CLM help companies be compliant?

That last point listed above creates a time-sensitive task for employers.  Under the new FTC rule, employers will be required to send communications within four months to affected employees that their NCAs are unenforceable. This requires employers to quickly identify which employees are under NCAs and whether their salaries make them subject to the new rule. 

If a company is using traditional, hands-on processes to retrieve and review documents in a case like this where regulations or other factors require action, it can devour a costly amount of time and effort. Imagine, too, if a company went through that costly analysis only to find the rule later disallowed by a court proceeding. They’ve just wasted those valuable resources.

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How customizable contract AI solves the challenge

When needs change, customizable contract AI can help contracting professionals readily handle them with much greater speed and efficiency at far less cost. Your contract AI platform could create and run new models in just minutes to search through employment agreements, find which contain NCA terms and extract salaries, and identify all the affected employees so the organization can  take quick action and remain compliant. 

Also, these extracted terms can then become standardized data points that enrich the data repository for all employment contracts going forward. They can be displayed in dashboards and reports, used to search and filter agreements, and even shared with connected HR and other enterprise systems. 

The new FTC rule is just one example of how constantly-shifting regulatory frameworks create time consuming tasks for legal and compliance teams that most contract lifecycle management (CLM) systems can’t readily support. Customizable contract AI empowers organizations to adapt quickly and stay ahead of the curve on compliance needs across any industry.