The FTC made headlines last month when it announced its Proposed Non-Compete Clause rule, which would render unenforceable and void non-competes nationwide. While the press and FTC have provided examples of the use of such clauses in the context of security guards and sandwich-makers, there is scant information available on how the proposed rule would impact agreements in the commercial real estate industry, where contracts with brokers and executives are paramount to setting the parties’ compensation terms both during the relationship and after it ends.
While non-competes have not historically been included in agreements with qualified real estate agents, their use has grown more common in recent years as large brokerage firms have consolidated the market. The use of non-competes in this context are exactly what the FTC is attempting to protect, as it results in less competition, driving down the rate of compensation for brokers and decreasing options for clients and investors. Further, senior brokers and executives of brokerage firms may be granted equity or quasi-equity compensation that is tied to a non-compete provision, which it particularly challenging for them to move between firms.
This blog post presents a series of answers to frequently asked questions by brokers and executives in the commercial real estate industry who are trying to make sense of the FTC’s proposed rule and its impact on their current and future obligations.
What does the proposed rule require?
The proposed rule, if adopted as drafted, would ban all future non-competes that apply post-employment or post-engagement and require firms to rescind all existing non-compete provisions that apply following the conclusion of an employment or contractor relationship by issuing a notice of rescission to each impacted worker.
Will the proposed rule apply to me?
Likely, yes. The FTC’s rulemaking authority applies broadly to many types of employers, including commercial real estate brokerage firms and their subsidiary and affiliated entities. Importantly, the rule extends beyond employees – it applies more broadly to all workers, including independent contractors and qualified real estate agents, who are often paid on a 1099 basis. This is a huge step forward from state legislation on non-competes that was focused primarily on prohibiting non-compete clauses in the employment context, but frequently failed to extend those protections to independent contractors.
Will the proposed rule invalidate the term of my contract or my forgivable loan?
Many brokerage firms induce qualified real estate agents to work for a fixed term of years by providing them with a contract for that period of time and an accompanying forgivable loan that is subject to achievement of time and performance-based measures. These agreements will not be impacted by the proposed rule, which applies only to post-engagement restrictions and which are not tied directly to competition. QREAs who have these types of agreements or are being asked to sign such agreements should consult with counsel to determine their contractual rights and obligations under these agreements.
I have a non-compete tied to the purchase of my brokerage firm. Will that still apply?
Potentially no. The FTC’s commentary to the proposed rule has an exception for non-competes entered into the sale of the business, with a threshold of 25% ownership of the sold entity. For those sellers whose percentage interest was below that threshold non-competes would no longer apply. This is particularly common in the CRE industry where larger brokerage firms have acquired talent not only through individual contracts, but also corporate acquisitions. Our Executives and Professionals Practice Group has extensive experience representing individuals and executives in the courts of M&A transactions. We assist individuals to ensure they are getting the appropriate protections and compensation in the course of such a deal.
Will my non-solicit or confidentiality obligations still apply?
Very likely, yes. The proposed rule expressly states that it does not apply to garden variety non-solicitation provisions or provisions prohibiting the disclosure of confidential information. However, non-solicitation restrictions that are drafted so broadly that they would prohibit an individual from working for any competitor, could be considered a de facto non-compete in violation of the rule.
Will my existing non-compete be impacted?
Yes, the proposed rule would apply retroactively. However, if the non-compete is part of a larger agreement, the rest of the terms in that agreement would still be applicable. So, for example, the non-compete in a commission plan may be rescinded but the brokerage firm would still be obligated to pay any commissions promised under that agreement.
Is my non-compete unenforceable now?
The FTC’s proposed rule has not yet gone into effect, and it may be significantly altered by the rule-making process. Individuals should continue to abide by their existing restrictions. However, your non-compete may be unenforceable under the laws of the state in which you reside and work or that govern the agreement. Many states have enacted legislation in the past 10 years that severely limit the use of non-competes, although not all extend those protections to independent contracts. Even so, non-competes have long been subject to judicial scrutiny. We suggest you consult with counsel to understand the scope of your contractual obligations and their enforceability. The attorneys in our Executives and Professionals Practice Group are seasoned advisors on how to understand, navigate and challenge your existing restrictive covenants.
If I sign a non-compete now, will it be enforced against me?
It could be. As stated above, the proposed rule has not yet gone into effect, and it may be substantially altered. Brokers and executives should not sign onto non-compete agreements under the assumption that they will soon be unenforceable. If you have been asked to sign a non-compete agreement, we suggest you consult with counsel to understand its scope and enforceability, and to seek assistance in negotiating its terms.
