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What to Do About Non-Compete Agreements

In April, the FTC announced it had issued a final rule banning non-competes nationwide

Nearly two years ago, President Biden issued an executive order calling on the Federal Trade Commission (“FTC”) to ban or limit non-compete agreements, stating that workers should be free to take a better job if someone offers it and that an employer should have to make it worthwhile for the employee to stay.

The White House move was based on a Treasury Department study that concluded non-competes reduce wages by an average of 1.4% and that job switching is generally associated with substantial wage increases. SAG and AFTRA welcomed the move, issuing statements that noncompetes are “a major problem” for its broadcaster members.  

On April 23, 2024, the FTC announced it had issued a final rule banning non-competes nationwide, with limited exceptions. The FTC determined that non-competes are an unfair method of competition and therefore are a violation of section 5 of the Federal Trade Commission Act (“FTC Act”). Thus, after September 4, 2024, the effective date of the new rule, employers will be prohibited from entering into non-compete clauses with their employees. In addition, existing non-competes for most workers and employees will no longer be enforceable. 

Employers will be able to continue to enforce existing non-competes for senior executives, however they will be unable to enter into new non-compete clauses with senior executives after the effective date of the rule. The FTC maintains that the new rule promotes competition nationwide, protects the fundamental freedom of workers to change jobs, increases innovation, and fosters new business formation.

The Treasury Department study claimed that the rule change would increase American workers’ earnings between $250 and $296 billion per year and promote greater dynamism, innovation, and healthy competition. The FTC also found that the new rule ensures that employers cannot exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.

Federal Trade Commission headquarters in Washington. A slew of business groups joined the US Chamber of Commerce in opposing the FTC’s proposal to ban non-compete agreements, arguing it would limit their ability to protect confidential information. Photographer: Ting Shen/Bloomberg via Getty Images

The FTC Rule

Under the FTC’s new rule, employers will be prohibited from entering into and enforcing non-compete clauses as follows: 

  • For non-senior executive employees, employers will be prohibited from both entering into and enforcing existing non-competes after the effective date of the rule. This means that, for all workers and employees that were not in “policy-making positions” and made less than $151,164 in total compensation in the preceding year, employers will be prohibited from enforcing non-competes. 
  • For senior executive employees, defined as workers who were in a policy-making position and made at least $151,164 in annual compensation in the preceding year, employers will be prohibited from entering into new non-competes but are allowed to enforce those non-competes that were in effect prior to the effective date of the new rule.
  • Employers are required to provide notices to employees with non-compete provisions or contracts that state that the employee’s non-compete clause “will not be, and cannot legally be, enforced against the worker.”

Consequences for Broadcasters

More than most industries, broadcasters are particularly sensitive to these issues given the investment often made in on-air talent development of their “on-air personalities” and the effort made to “brand” a show. Station management often invests heavily in the show that is tied to the talent and typically has a strong role in developing the station sales and salespeople. There is therefore a desire and need to protect the character of the show, the on-air “personalities” developed for it and the advertiser and customer lists of the station. And, unlike some state-level non-compete bans, the new FTC federal prohibition includes almost no exemptions, essentially allowing non-competes only for “C-Suite” executives or when selling a business.

In today’s environment of voice tracking and audience research, skilled employees continue to be valued not only for what they bring to the station, but for the damage they can do if hired away by the local competition. A key sales employee can be worth her weight in gold, literally. And, while many stations are seeking to control costs by moving away from live talent, the key to many stations’ success is the successful promotion of its local on-air talent and the on-air characters they create. Indeed, a popular local personality, particularly in smaller and medium sized markets, may be the ticket to ratings success and represents a substantial capital investment by the station in local promotion.  

So, given the new rule, station owners will be looking for new strategies to protect their “personality” and sales strategy investments against another station that might try to “steal” the talent (and the capital investment that went into her promotion), or against the talent’s attempt to capitalize on his popularity with an offer from another local station. Key sales staff develop close relationships with advertisers. Station management frequently tries to keep that salesperson and advertiser relationships tied to the station with covenants not-to-compete and confidentiality clauses that claim the sales list as intellectual property or a trade secret of the employer.

So, with the new FTC rule having become effective, stations must look to other concepts for protection. Here are some ideas not dependent on non-competes that have worked in the past.

New Strategies for Protection

As the FTC’s own fact sheet states, “employers have other ways to protect trade secrets and other valuable investments.” Good broadcasters know that it is wise to invest in and promote good talent who will relate to the community, promote the public service value of the station, and cause the community to relate to the station, and that can be expensive. So, it is not unreasonable that, if done successfully, the station will want to and should seek to protect its “personality” investment against another station that might try to “steal” the talent.  After all, station number two didn’t have to spend that capital. 

Post Employment Consulting

One method that has sometimes worked is to replace the non-compete with a compensated consulting period following termination of the active employment for a reasonable period, with or without actual consulting taking place.  As a consultant, the employee would not be able to work for a competitor while on salary to its former station. This places a period of time, say three or six-months, between the end of employment and the ability to bring the old personalities or sales lists to a new station. It cannot be overemphasized that this is a very difficult area and should be undertaken only with the advice and guidance of a skilled professional knowledgeable in this area of employment law.

Intellectual Property Protection

Several examples drawn from court cases illustrate alternative methods of protection. For-on air talent, program producers and others, management can protect the station with provisions in employment agreements that establish that the identifiable on-air character developed at the station is the property of management, not the on-air talent. The station can also establish the identity of the show and document that the show name and other unique characteristics of the show are also being developed for the station, not the talent. 

For salespeople, document in writing that the sales lists and any prospecting is done for the station and the lists and product of sales efforts is the confidential property of the station.

One example occurred when a successful radio sales executive of a Cumulus Connecticut station moved across the street. While losing on the lawsuit to enjoin the salesperson from visiting its advertisers or soliciting any more of its employees to move to the new station, the court did require the employee to return certain materials alleged to be confidential and further enjoined her from soliciting other employees to jump ship.  A Florida lawyer and author of a non-compete blog followed the case and took this from it:  Cumulus basically lost the non-compete case, but the lesson here is “Leave it behind. Documents, customer lists, confidential files. Leave all of it behind.  Do not attempt to take it with you for use at your new employer.”

Broadcasters can ensure this happens by including provisions in their employment agreements to specify that all customer lists, sales lists and sales data comprise confidential employer trade secret property and cannot be used or accessed for any purpose other than to generate sales for the current station or employer.

Similarly, as programs develop an “identity” and talent create “characters” it should be stated clearly in station policy and employment agreements that the show and character identities were created for the benefit of the station employer, are the intellectual property of the employer, and may not be used outside of the station without the explicit permission of the employer.  To the extent possible, stations should register any trademarks or service marks associated with on-air talent as the intellectual property of the station employer.  Such registration ensures that even if talent leaves, the phrases, taglines, shows, and segments, as well as fictional identities and nicknames the station has invested time and resources in promoting and associating with the station will remain with the station, not the talent.

For example, New York’s legislature banned non-compete clauses for on- and off-air broadcasting employees that extend beyond the term of employment in what it called the Broadcast Employees Freedom to Work Act.  So, when the contract of a New York Cumulus morning team, Scott and Grosvent, marketed as “The Show” ran out, they took their “gig” across town. Cumulus sued for violation of the post-employment non-compete and violations of various intellectual property rights, including titling the show as “The Show” and using various fictional characters in their sketches. 

While a New York judge ruled that the non-compete did not prevent the team from moving to a competitor station, the agreement did ban them from referring to their program as “The Show,” ruling that the title belonged to Cumulus, since it had been created there. The team was also banned from using the fictional characters and named program segments.  Once more, the lesson is: they can go if they want to, but they must leave the station property behind.

The Lessons

Non-compete agreements have always been a risky bet; while the FTC has now banned non-competes on a national level, this is not new: many states have limited or banned non-compete clauses for years. With or without them, the better bet is to examine what information and promotional identities can be protected and to broadly and promptly protect the station’s property rights as its intellectual property.

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