FTC Votes to Implement Nationwide Ban on Non-Compete Agreements

2 minute read

On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to implement a nationwide ban on non-compete agreements. The FTC’s final rule (the “Rule”) makes most existing non-competes with employees and independent contractors unenforceable and largely prohibits employers from entering new non-competes. The FTC’s rationale for the ban is its finding that non-competes are an unfair method of competition.

The Rule contains some limited exceptions. It does not apply to existing non-competes with senior executives that were entered before the effective date of the Rule. A senior executive is someone whose total annual compensation is more than $151,164 and holds a policy-making position (which is typically the president, CEO, or other officer with policy-making authority). Employers should note, however, that they cannot enter new non-competes with senior executives.

The Rule also excludes non-competes entered into by a person pursuant to the sale of a business entity, of the person’s ownership interest in a business entity, or all or substantially all of a business entity’s assets. And the Rule does not apply to non-competes that are part of litigation which arose prior to the Rule’s effective date.

The Rule does not prohibit confidentiality or non-solicitation of customer agreements. However, the FTC may try to argue that very broad non-solicitation agreements (which essentially prohibit solicitation of nearly all the customers in an industry) fall within the FTC’s definition of a non-compete. The FTC defines a non-compete as any agreement that prohibits a worker from seeking or accepting work.

The Rule does not go into effect until 120 days after it is published in the Federal Register. We anticipate significant litigation challenging the Rule. The first lawsuit was filed the same day the Rule was announced.

Before the Rule goes into effect, employers must give written notice to all workers with whom it has entered non-competes made unenforceable under the Rule. The notice must state that the employer will not enforce the non-compete. Such notice must be issued by the Rule’s effective date. Model language for the notice is available at https://www.ftc.gov/legal-library/browse/rules/noncompete-rule.

Please stay tuned for further updates as the litigation regarding the Rule progresses.

This article is for informational purposes only and should not be considered legal advice. Please consult with your legal counsel regarding any specific situation.

Written by Christie Newkirk and Tayler Gray from Carrington, Coleman, Sloman & Blumenthal, L.L.P.

Navigating the Corporate Transparency Act: Compliance Essentials for Businesses

3 minute read

Beginning next year, the Corporate Transparency Act (“CTA”) will require most smaller companies to report information regarding their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”). Reporting companies formed after January 1, 2024, will have 30 days after formation to report this information, and those formed prior to 2024 will have until January 1, 2025. The CTA applies to domestic and foreign entities that are formed or registered to do business in the U.S.  The purpose of the CTA is to make it harder for bad actors to use shell companies or other opaque ownership structures for illicit activities.  This client alert is a high-level summary of some of the requirements of the Corporate Transparency Act and should not be relied on as legal advice.

Reporting Company

The new law imposes reporting obligations on “Reporting Companies,” which include corporations, limited liability companies, and any other similar entity formed or registered to do business in any U.S. state, unless the company qualifies for an exemption. The most notable exemption is for “Large Operating Companies,” which are companies with (1) more than 20 full time employees, (2) more than $5 million in gross revenue from U.S. sources, and (3) a physical presence in the U.S.

Beneficial Owners

A Reporting Company must report detailed information about each of its “Beneficial Owners,” which includes any individual who, directly or indirectly, owns at least 25% of the Reporting Company, or otherwise exercises substantial control over the Reporting Company. Executive officers, managers, and directors of a Reporting Company will generally be treated as Beneficial Owners due to their ability to control the Reporting Company. Reporting Companies that are owned or controlled by other entities will have to look through those entities and report the human that ultimately controls at least 25% of the ownership interests, unless the entity is itself specifically exempt from the reporting requirements.

Company Applicant

“Company Applicants” who form a Reporting Company after December 31, 2023, are also required to furnish information about themselves to FinCEN. Company Applicants are the persons who form the Reporting Company, including both the individual who directly files the formation or registration document and the individual who is primarily responsible for directing the filing. For example, if a law firm forms a new company for a client, both the paralegal filing the documents and the lawyer directing the paralegal to make the filing will be Company Applicants.

Information to be Reported

A Reporting Company will be required to provide information about itself, its Beneficial Owners, and Company Applicants. Information required about the Reporting Company includes its:

  • full legal name and any trade name;
  • current address;
  • jurisdiction of registration or formation; and
  • Taxpayer Identification Number.

Information Required about Beneficial Owners and Company Applicants includes:

  • full legal name;
  • date of birth;
  • current address; and
  • unique identification number from an acceptable form of identification, such as a passport or driver’s license, and a copy of the document.

Use of Beneficial Ownership Information

FinCEN is required to maintain beneficial ownership information on a “secure, nonpublic database.”  Nevertheless, FinCEN may be required to share Beneficial Owner information with other government agencies engaged in national security, intelligence, or law enforcement, including under certain circumstances, state, local and foreign agencies.

Ongoing Reporting Obligations

Reporting Companies will have an ongoing obligation to ensure their reports remain complete and correct. For example, changes in beneficial ownership information will require the Reporting Company to file an amendment within 30 days of the change.

Penalties for Violating the CTA

Failure to meet the reporting requirements can result in civil or criminal penalties including a fine of up to $10,000 and imprisonment for up to two years.

What to do Now

Reporting Companies formed prior to January 1, 2024, should begin collecting the required reporting information from their Beneficial Owners in anticipation of having to report that information next year. Company Applicants and others should put policies and procedures in place to collect beneficial ownership information prior to forming any new Reporting Companies. We recommend that you contact your attorney or other professional who is familiar with the reporting requirements to ensure that you are CTA compliant prior to the January 1, 2024 deadline.

For more information, please contact George Lee (glee@ccsb.com) or Ashley McMillan (amcmillan@ccsb.com).

Warhol v. Goldsmith: Creative Fair Use or Copyright Infringement?

3 minute read

In 1981, Lynn Goldsmith was commissioned by Newsweek to photograph Prince. Years later, Goldsmith granted a limited one-time use license for Vanity Fair to use one of her photos of Prince as an “artistic reference for an illustration.” The illustration was Andy Warhol’s portrait of Prince known as “Purple Prince.” However, Warhol went further and created a series of artwork based on Goldsmith’s photograph.

After Prince died in 2016, Vanity Fair’s parent company Conde Nast learned about the Prince series created by Warhol and purchased a license from the Andy Warhol Foundation (“AWF”) to publish one of the works from the series known as “Orange Prince.” Goldsmith didn’t know about the additional Prince series until 2016 when she saw Conde Nast’s magazine with Orange Prince on the cover. After she reached out to Conde Nast requesting compensation for the use of her copyrighted material, AWF sued Goldsmith for a declaratory judgment of noninfringement, or alternatively fair use. Goldsmith counterclaimed, stating Orange Prince was copyright infringement.

The Supreme Court Resolved the Dispute in Goldsmith’s Favor, But Not Entirely

The Supreme Court’s decision focuses on the first prong of the fair use test only and emphasizes the importance of the underlying purpose when creating a transformative work. An artwork becomes truly transformative when the purpose of the use is distinct from the original artwork copied, “otherwise, transformative use would swallow a copyright owner’s exclusive right to prepare derivative works.” The purposes listed as fair uses of another’s work of art include criticism, comment, news reporting, and teaching, among others. Copyright law allows these purposes because, as noted by the Court, “they contemplate the use of an original work to serve a manifestly different purpose from the work itself.”

Here, the purposes of the copyrighted photograph and Orange Prince were essentially the same—both present portraits of Prince for commercial purposes in magazines to illustrate stories about Prince. The commercial use of both works was critical to the analysis and weighted heavily against fair use for AWF. Bottom line, the “degree of difference [was] not enough for the first factor to favor AWF, given the specific context and commercial nature of the use.”

Key Takeaways

Copyright law entitles artists to protect their art, including the right to prepare derivative works that transform the original. In order to constitute fair use of another’s copyrighted work, the new work must have a purpose and character sufficiently distinct from the original artwork’s purpose and character. This decision expands protection granted to photographers and prevents other artists from recreating their photographs in slightly altered forms for use in competing commercial purposes.

What did the Supreme Court not address?

The Supreme Court did not express an opinion as to the creation, display, or sale of the remaining works in the Prince Series created by Warhol and not included in Vanity Fair’s publication of Orange Prince. They also did not revise the four-pronged fair use test that has been used since 1994. Instead, the Court limited its focus and ruling on AWF’s commercial licensing of Orange Prince—a work derived from Goldsmith’s photograph. This suggests that if Orange Prince was not used as the cover of a magazine as it was in this case, it may have been considered fair use, but the Court did not conclusively decide this issue.

Future Considerations

In her dissent, Justice Kagan points out that “what matters under [the first] factor, the majority says, is instead a marketing decision: In the majority’s view, Warhol’s licensing of the silkscreen to a magazine precludes fair use.” Because Goldsmith licensed the photo in the initial instance, Warhol’s licensing was “copying” her purpose for the work. But what if the copyrighted image was captured for purely artistic purposes, and then a different artist created something transformative (like Warhol in this case) and licensed that subsequent work for a different purpose? This factual scenario presents two different purposes, and the majority’s opinion gives no guidance on how to resolve disputes beyond the unique facts of this case that pit competing commercial purposes against each other.

The Court’s decision also begs the question of the original license. The majority may have intended that any subsequent artist who attempts to license a “transformative” work will not be able to argue fair use merely because it is being used for commercial purposes. But the opinion’s focus on the first factor as a “matter of degree” will make this opinion challenging to apply to new situations.

It’s Time to Revise Confidentiality and Non-Disparagement Provisions

2 minute read

The National Labor Relations Board (“NLRB”) recently restricted employers’ ability to use broad confidentiality and non-disparagement language in severance and other agreements. 

Background and Findings

In its February 21, 2023, McLaren decision, the NLRB held that an employer violates the National Labor Relations Act (“NLRA”) when it offers an employee a severance agreement that has a “reasonable tendency” to interfere with, restrain or coerce employees in the exercise in their NLRA rights.  NLRA rights include an employee being able to discuss the terms and conditions of employment or report potential violations of the NLRA to the NLRB.  Although many employers assume that the NLRA only applies to unionized workforces, the statute actually provides these rights to non-management personnel at non-unionized workplaces as well.

The McLaren severance agreement contained two problematic provisions.  First, the confidentiality provision prohibited the employees from disclosing the existence and terms of the agreement “to any third party.”  The NLRB found that this provision would reasonably tend to coerce the employees from discussing the agreement with their union representatives, filing an unfair labor practice, or assisting the NLRB with an investigation.  It would also impair other employees’ rights to call upon the employees for support in deciding whether to sign a similar agreement.  And second, the non-disparagement provision prohibited the employees from making negative comments to their coworkers, the general public, and potentially the NLRB.  The NLRB found that this clause would chill the employees’ NLRA rights to file NLRB charges or assist the NLRB in an investigation.  Consequently, the NRLB found both provisions unlawful.  Notably, the NLRB considered the mere act of offering the unlawful provisions to the employees to be an independent violation of the NLRA (even if the employees had not accepted the agreements, or if the employer did not intend on enforcing the unlawful provisions).

Takeaways for Employers

Given the McLaren decision, it is a good time for employers to take stock by doing the following.

Review form agreements.

Employers should take this opportunity to review their severance agreements as well as other agreements that contain confidentiality and non-disparagement provisions.  Employers should ask whether confidentiality and non-disparagement provisions are necessary and, if they are, whether they are narrowly tailored. 

Include a disclaimer.

The NLRB hinted that a disclaimer in the severance agreement, stating that nothing in the agreement restricts employees’ rights under the NLRA, might have saved the provisions at issue in McLaren.  Employers should consider inserting such disclaimers with or near any confidentiality and non-disparagement provisions. 

Include a severability provision.

While it is unlikely that the McLaren decision invalidated the severance agreements in their entirety, the decision highlights the importance of including a “severability” provision providing that, in the event that any provision is found to be invalid, the remainder of the agreement is still enforceable.

Continue to monitor.

As administrations change, so does the composition of the NLRB.  This case is just one example of the NLRB’s reversal to a pre-Trump era rule.  And, this case is subject to appeal and could be reversed or modified later.  So, employers should continue to monitor this decision.

Retroactive?

Finally, it is unclear whether the McLaren decision applies retroactively.  Fortunately for employers, the NLRA has a six-month statute of limitations (i.e., deadline to file charges) and, so, any non-compliant agreements will become a non-issue soon.

This article is for informational purposes only and should not be considered legal advice. Please consult with your legal counsel regarding any specific situation.

FTC Issues Proposed Rule Banning Non-Competes

2 minute read

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a rule prohibiting employers from entering or enforcing non-compete clauses with their workers.  The proposed rule would supersede any inconsistent state law.  Given a March 2022 US Treasury Department report finding that one in five Americans is subject to a non-compete, this proposed rule – if it becomes final – will have a significant impact on the workplace.

The proposed rule prohibits employers from asking workers to enter non-competes and requires them to rescind any existing non-competes (through written notice) within 180 days of the date the final rule is published.  The term “worker” includes not only employees but also any person who works for an employer, whether paid or unpaid, such as independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide services to a client or customer.  Interestingly, the rule also bans contractual terms that essentially function as a non-compete clause, such as an overly broad non-disclosure agreement that effectively precludes the worker from later working in the same field or a requirement that a worker re-pay training costs if the worker’s employment ends within a specified time period (where the required payment is not reasonably related to the employer’s actual cost). 

The proposed rule would not prohibit non-compete clauses entered into in connection with the sale of a business or all of its assets where the person restricted by the non-compete is a substantial owner in the business entity. 

The rule is subject to public comment for the next 60 days.  The FTC will then consider those comments and publish the final rule.  Employers must comply with the final rule by the 180th day after it is published. 

The FTC notice also requested public comment on alternatives to the proposed rule.  The alternatives include:

  • Banning non-competes for workers making less than a certain wage threshold and, either having no rule regarding the non-competes of higher-earning workers or having a rebuttable presumption of illegality with respect to their non-competes;
  • Having a rebuttable presumption of illegality for all non-competes; or
  • Having a rebuttable presumption of illegality for the non-competes of workers earning less than a certain wage threshold with no rule regarding the non-competes of higher-earning workers.

The proposed rule is part of the FTC’s broader effort to eliminate post-employment restrictions for employees.  The FTC recently took action against three different companies, forcing them to drop non-compete restrictions previously in place for thousands of workers.  The FTC’s hostility towards post-employment restrictions is consistent with the growing trend of states preventing or significantly restricting an employer’s right to demand compliance with non-competition and non-solicitation agreements.  California, Colorado, Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, North Dakota, Oklahoma, Oregon, Rhode Island, Virginia, and Washington have passed some of the more stringent laws with respect to post-employment restrictions.

Not surprisingly, numerous business groups have already threatened legal challenges to the FTC’s proposed rule, arguing that Congress never delegated the authority to create this sort of rule to the FTC and that the proposed rule is unlawful.  Employers should remain alert for further developments on the proposed rule.  If and when a final rule is published, only the FTC can seek relief on behalf of aggrieved workers; it does not appear to create a private right of action for workers.

The proposed rule may be found at https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.

This article is for informational purposes only and should not be considered legal advice. Please consult with your legal counsel regarding any specific situation, particularly given that this is a rapidly developing area of the law.