A noncompetition agreement, also known as a noncompete clause or covenant not to compete, is a contract between an employer and an employee, or between two companies. In such an agreement, one party agrees not to enter into a similar profession or trade in competition against the other party, for a specific period of time and within a certain geographical area.
These agreements are commonly used to protect a company’s trade secrets, confidential information and client relationships. They typically restrict employees from working for a competitor or starting a competing business for a certain period after leaving their current employment.
While this rule offers numerous benefits for workers by enhancing their mobility and earning potential, it also presents new challenges for employers in the adult industry.
The enforceability of noncompete agreements varies by jurisdiction and must adhere to certain legal standards to be valid. In fact, in some United States jurisdictions such as California, Oklahoma, North Dakota, Montana, Colorado, New Mexico and Oregon, noncompete agreements are generally unenforceable or disfavored, with limited exceptions.
The adult industry is no stranger to noncompetes. There have been numerous complex disputes and prolonged litigation between adult companies and workers.
Now the federal government has decided to weigh in on the issue. In a significant move to foster competition and enhance worker mobility, the Federal Trade Commission (FTC) has issued a final rule banning noncompete clauses in employment contracts. Announced on April 23, this new regulation marks a dramatic shift in labor policy and is poised to have widespread implications across various sectors, including adult.
It should be noted that the FTC voted along party lines in a 3-to-2 decision to adopt the new rule, which is set to take effect Sept. 4, pending legal efforts to block it — something that will be discussed later in this article.
The New Rule
The FTC’s rule prohibits employers from entering into noncompete agreements with workers, a practice previously used to restrict employees from joining competitors or starting their own businesses within the same industry. This ban extends to all forms of noncompete clauses, including those that might indirectly prevent competition by imposing penalties on workers for seeking new employment opportunities.
According to FTC Chair Lina M. Khan, noncompete clauses have been detrimental to the economy by suppressing wages, stifling innovation and limiting new business formation. The FTC estimates that the rule will lead to the creation of over 8,500 new businesses annually and increase average worker earnings by $524 per year. Of course, many other organizations and people disagree with Khan’s position and argue that noncompete agreements have been enforceable since before the country’s founding and that the rule should be delayed until its legality is decided in court.
Implications for the Adult Industry
The adult industry, which often relies on restrictive covenants to protect trade secrets and retain talent, will be significantly impacted by this new rule. Companies in this sector must immediately reassess their contractual agreements and find alternative ways to safeguard their interests. Results of the new rule may include:
• Increased talent mobility: With the removal of noncompete clauses, performers and other workers will have greater freedom to move between employers or start their own ventures. This could lead to more dynamic career paths and potentially higher earnings for individuals as they leverage their talents across multiple platforms.
• Shift in employment strategies: Employers will need to innovate in their approaches to talent retention and intellectual property protection. This might involve enhancing workplace culture, offering more competitive wages and investing in employee development, to build loyalty without relying on restrictive agreements.
• Legal and compliance considerations: Businesses must ensure compliance with the new FTC rule by reviewing and updating their existing employment contracts. Notices must be sent to current and former employees informing them that any existing noncompete clauses are no longer enforceable. This notification can be delivered via hand, mail, email or text message. It is imperative that businesses discuss the new rule with their legal advisors now.
Exceptions and Legal Challenges
There are limited exceptions to the rule, such as noncompete clauses associated with the bona fide sale of a business. Additionally, while the rule prohibits new noncompetes for senior executives, it allows the enforcement of existing noncompetes for this small subset of the workforce.
Legal challenges to the rule have already been mounted. The U.S. Chamber of Commerce and other groups argue that the FTC lacks the authority to enforce such a regulation and that it represents government overreach. These challenges are expected to delay the rule’s implementation and could result in further modifications depending on the outcomes in court.
Within hours of the new rule’s announcement, the first lawsuit was filed against the FTC in the Northern District of Texas in Ryan, LLC v. Federal Trade Commission. The United States Chamber of Commerce, the nation’s largest business advocacy group, announced prior to the new rule’s unveiling that it planned to file suit to block the rule should the agency vote to ban noncompete agreements. It followed through on its plans in a lawsuit filed in the Eastern District of Texas, Chamber of Commerce of the United States of America, et al. v. Federal Trade Commission. In the Eastern District of Pennsylvania, another lawsuit was filed against the FTC, Chair Lina Khan and each of the FTC’s commissioners in their official capacities: ATS Tree Services, LLC v. Federal Trade Commission, et al.
Each of the lawsuits raises similar challenges to the new rule, including that 1) the FTC lacked or exceeded the statutory authority to issue the noncompete rule, 2) the noncompete rule is an unconstitutional delegation of legislative power, and 3) the noncompete rule is arbitrary and capricious.
Many more legal challenges to the new rule are expected and will undoubtedly involve a prolonged legal process. The legal challenges will most likely lead to injunctions that will at the very least delay the effective date of the new rule.
Some Final Thoughts
The FTC’s ban on noncompete clauses represents a significant policy shift aimed at promoting economic freedom and competition. While this rule offers numerous benefits for workers by enhancing their mobility and earning potential, it also presents new challenges for employers in the adult industry. As the industry adapts to these changes, it will be crucial for adult companies to find innovative ways to attract and retain talent while ensuring compliance with the new regulatory landscape.
The new rule does not explicitly ban confidentiality, nondisclosure agreements or nonsolicitation agreements, which I highly recommend adult businesses understand and utilize.
This article does not constitute legal advice and is provided for your information only and should not be relied upon in lieu of consultation with legal advisors in your own jurisdiction. It may not be current as the laws in this area change frequently. Transmission of the information contained in this article is not intended to create, and the receipt does not constitute, an attorney-client relationship between sender and receiver.
Corey D. Silverstein is the managing and founding member of Silverstein Legal. His practice focuses on representing all areas of the adult industry and his clientele includes hosting companies, affiliate programs, content producers, processors, designers, developers, operators and more. He is licensed in numerous jurisdictions including Michigan, Arizona, the District of Columbia, Georgia and New York. Contact him at MyAdultAttorney.com, corey@myadultattorney.com and 248-290-0655.
