Restraints of Trade /Non Competes, where they could be headed in Australia thanks to USA changes

In January 2024 the U.S. Federal Trade Commission (FTC) proposed a groundbreaking ban on non-compete clauses in a move designed they believe to increase employment market competition and worker mobility. This significant policy shift could have a ripple effect internationally, potentially influencing employment practices and legal frameworks in other countries, including Australia.

Given the current Albanese government’s views on this area, there is a strong possibility that similar reforms could be considered in Australia.

US Stance

The FTC's proposed rule would prohibit employers from entering into non-compete clauses with their workers and require employers to end existing non-compete agreements.

Potential Flow-On Effects to Australia

1.       Employment Agreements

·       Alternative Protection Mechanisms: If Australia follows the FTC's lead, non-compete clauses in employment contracts could be deemed unenforceable (Although we could find that distinctions be made depending on the person’s role and pay level).

Businesses would need to review their existing agreements and then potentially rely upon other mechanisms to protect their interests, such as confidentiality agreements and non-solicitation clauses. Also certain business practices around how they deal with confidential information, with who owns phones and laptops, and security around these items and any confidential information may also need to be considered.

·       Increased Mobility: The removal of non-compete clauses could lead to greater employee mobility, prompting businesses to focus more on employee retention strategies and competitive remuneration packages, and may also make it easier for employees to set up their own businesses or have other businesses grab onto exiting employees of other competitors.

2.       Contractor Agreements

·       Project-Specific Protections: If this extends to these types of arrangements, then without non-compete clauses, businesses might turn to project-specific confidentiality agreements to ensure contractors do not share sensitive information or proprietary methods with competitors.

Again similar to employment arrangements, additional considerations will need to go into existing arrangements and the updating or creating of new arrangements to provide alternative protections.

·       IP Ownership Clarity: Clearly defining intellectual property (IP) ownership in contractor agreements becomes even more critical to protect business innovations and proprietary information.

3.       Business Sale and Purchase Agreements

·       Valuation and Goodwill: Valuation and Goodwill could be at risk of devalue if this take extends to these types of sales (which we would hope would not happen, or at least not to the extent of the general employee scenarios). Non-compete clauses are often used in business sales to protect the value of goodwill. Their removal could necessitate other forms of protection, such as extended transition periods or more robust confidentiality agreements.

·       Negotiations & Additional Agreements: More extensive due diligence may also be needed to understand any additional risks or issues to be considered when you know you can’t rely upon non compete clauses. At the same time sellers may need to implement strong non-disclosure agreements (NDAs) and review how they allow due diligence processes to maintain the confidentiality of sensitive business information.

4.       Franchise Agreements

·       Competition Implications & Reviews: Franchise agreements often include non-compete clauses to prevent franchisees from operating similar businesses, this overall being suggested to not only benefiting the franchisor but other networks of franchisees who remain or the new franchisee who may have purchased the relevant franchise business.

Without these clauses, franchisors may need to strengthen other contractual protections to safeguard their business models for them and their network.

Saying the above, it should be noted that with the Unfair Term Law changes in the last few years as well as the Franchising Code of Conduct (mandatory Australian law that the franchising industry is to abide by) making it clear that in some instances restraints of trade/non compete will not apply – changes here to find alternative ways for protection should already be happening now!

·       Franchise Design & Customer: Franchisors may want to reconsider customer ownership and handling questions and processes. There are steps that can be taken to reduce risks where non-compete clauses cannot be relied upon.

·       Brand Loyalty & Investment in Franchisees and their Team: Fostering strong brand loyalty among franchisees and their team, may be something to be considered to keep people passionate about protecting and growing the brand, so as to want to continue with the brand.

Reviewing and Updating Business Processes

Given the potential changes we could see, Australian businesses should proactively review and update their processes and agreements to ensure they are prepared for a possible ban on non-compete clauses or at least laws to reduce how far businesses could previously go.

Just a few Key steps include:

1.       Strengthening Confidentiality Provisions: Enhance confidentiality clauses in all agreements to protect sensitive information. This includes specifying what constitutes confidential information and outlining the obligations of the receiving party.

2.       Utilising NDAs More Effectively: Employ NDAs more extensively to safeguard proprietary information shared with employees, contractors, potential buyers, and franchisees. Ensure these agreements are detailed and enforceable.

3.       Customer Ownership & Control: This is a surprising area where there can be debate as to who the customer belongs to if not properly defined in your agreements. Furthermore, there should be robust processes around customer dealings to ensure that the relationship belongs to the business rather than the individual.

4.       Revising IP Protection Strategies: Breaking down all your IP and then clearly defining IP ownership (initial and for any developments) and usage rights in all relevant agreements. Implement robust measures to protect your business’s innovations and proprietary information.

5.       IT Back up: A review of how Information Technology is used in your business, and potential exposures/risk and any benefits that can be implemented to protect your intellectual property and confidential information.

6.       Conducting Regular Legal Reviews: Periodically review all agreements with the assistance of your expert business lawyer to ensure compliance with current laws and to identify and address any potential vulnerabilities to ensure you and your business are protected and valued now and going forward.

At Advantage Partners Lawyers, we recognise the importance of staying ahead of legal developments that could impact your business. Our experienced legal team can assist you in reviewing and updating your agreements to ensure they are robust and compliant with any new regulations. Here’s how we can help:

·       Comprehensive Agreement Reviews: We conduct thorough reviews of your existing agreements, providing recommendations to strengthen their enforceability and compliance with potential new laws.

·       Drafting Customised NDAs and Confidentiality Agreements: Our team drafts tailored NDAs and confidentiality agreements that address the unique aspects of your business relationships.

·       Providing Ongoing Legal Support: We offer ongoing legal support to help you stay informed about changes in the legal landscape and ensure you and your business are in its best position now and into the future.

Get in touch with us to ensure your agreements are effectively protecting your business interests. Book a free, no-obligation initial discovery call to discuss your specific needs and how we can assist you.

Please note that this is a general and brief update, it does not purport to be comprehensive legal advice of all information and/or relevant to your circumstances. Consequently, specific legal advice for each of your circumstances should be obtained first before taking or not taking any action with respect to this area.