FTC’s Non-Compete Ban: Status & Next Steps

UPDATE – August 21, 2024

Yesterday afternoon (August 20, 2024), the United States District Court for the Northern District of Texas blocked the Federal Trade Commission’s (FTC) Final Rule banning most non-competition agreements between employers and workers. The court had previously issued a preliminary injunction in the temporarily enjoining the ban—but only for the parties in the lawsuit. Tuesday’s order upholds the challenge to the Rule and blocks the Rule nationwide.

The Rule was set to become effective September 4, 2024. It is possible, and likely, that the FTC will appeal the ruling. For now, however, non-compete agreements will continue to be enforceable under federal law (though they remain subject to any applicable state requirements and restrictions), and employers will not be required to issue notices to workers that non-competes are unenforceable by the former September 4 deadline.

On April 23, 2024, the Federal Trade Commission (FTC) issued a rule banning most employee non-competition agreements nationwide. The Rule, set to take effect September 4, 2024, has been challenged in multiple lawsuits, and the future of the Rule is uncertain. In this Client Alert, we review what employers need to know about the FTC’s non-compete ban and what steps employers can take to prepare right now.

What Does the FTC’s Rule Provide?

Overview: The Rule prohibits employers from entering into or enforcing any non-compete clause, which is defined as a contractual provision or workplace policy that prohibits a worker from, or penalizes a worker for, “seeking or accepting work in the United States with a different person” or “operating a business” after such worker is no longer employed with that employer. Notably, the Rule extends to other restrictive covenants (such as non-solicitation and non-disclosure clauses) if such provisions restrain such a large scope of activity that they “function to prevent” a worker from seeking or accepting other work or starting a new business after their employment ends. The Rule does not affect restrictions that apply only during the term of the worker’s employment.

Exceptions: The Rule does not ban existing agreements (i.e. already in place before the Rule’s effective date) with any “senior executive,” defined as a worker earning at least $151,164 per year in a “policy-making position.” The Rule also does not ban non-compete agreements entered into pursuant to a bona fide sale of a business.

Notice Requirements: For each prohibited non-compete clause, the employer must provide clear and conspicuous notice to the worker that the clause will not be, and cannot legally be, enforced against the worker. The Rule does, however, allow such a notice to be sent to employees generally (which may be simpler than identifying just those employees who have non-compete clauses). Delivery of these notices must be accomplished by the Rule’s effective date. The FTC has published a model notice, although employers may create their own if they satisfy the notice requirements.

Will the Rule Go into Effect on September 4, 2024?

Maybe, but this is not yet clear. At least three legal challenges are pending, with varying outcomes:

• In Ryan LLC v. FTC (N.D. Tex., July 3, 2024), a federal district court held that the challengers would likely prevail in its argument that the FTC overstepped its rulemaking authority. The court did temporarily enjoin the non-compete ban, but only with respect to the parties involved in the lawsuit. The court stated, however, that it intends to issue a ruling on the merits by August 30, 2024—just days before the Rule is scheduled to become effective.
• In contrast, a different federal district court found that the FTC is likely to prevail in its arguments for upholding the Rule. In ATS Tree Services LLC v. FTC, (E.D. Pa., July 23, 2024), decided weeks after Ryan, the court denied the employer’s request for a preliminary injunction against the Rule, holding that the FTC has broad statutory authority to regulate unfair methods of competition.
• Most recently, in Properties of Villages, Inc. v. FTC (M.D. Fla., Aug. 14, 2024), a federal district court temporarily enjoined the FTC’s Rule, but (as in the Ryan case) that relief extends only to the plaintiff in that case. The court declined to issue a nationwide injunction at this stage of the proceeding.

As of right now, no court has blocked the FTC on a nationwide scale. The Ryan court’s opinion is expected by the end of August, however.

What Should Employers Do If the Law Remains in Flux as of September 4^th?

With the present uncertainty over whether the Rule will become effective on September 4, the obvious question for employers is: “Should we send out notices now to employees about the Rule’s non-compete ban?” Doing so could stir up anxieties among employees whose departure might most hurt the employer, but failing to do so would violate the Rule if it indeed goes into effect. Employers will need to select from difficult choices, including the following, among others:

• Some employers will choose not to issue the notice, taking the position that they have a good faith reason to await clarification from courts, including appellate courts and ultimately, perhaps, the U.S. Supreme Court.
• Employers that are more riskaverse will issue a notice before September 4 that alerts employees to the potential applicability of the non-compete ban but that reserves the employer’s right to enforce non-compete clauses if the Rule is found to be invalid.
• Other employers will choose to issue the required notice in form comparable to what the FTC has already provided as a sample notice. The risk there, however, is that if the Rule is invalidated or withdrawn, restoring the retracted clauses might be legally impossible, or at least impractical from an employee relations standpoint.

What Steps Should Employers Be Taking Now?

Despite uncertainty regarding whether and when the Rule will go into effect, employers with employees or former employees subject to non-compete clauses (or their functional equivalent) should consider the following steps to prepare:

• Monitor legal challenges to the Rule. With the pending legal challenges to the Rule and a decision on the merits expected by the end of the month, employers should monitor legal updates that impact the validity and/or effective date of the Rule.
• Identify which employees will be affected. If the Rule is not invalidated or delayed, employers technically are required to comply with the Rule as of September 4, 2024. In preparation for this possibility, employers should determine which current and former employees are subject to a noncompete clause, and who might qualify as a “senior executive.”
• Consider whether a new noncompete clauses should be put in place for senior executives. Although time may be running short, employers may want to consider whether to seek new or amended noncompete clauses with those key employees who fit the “senior executive” definition. Doing so before September 4 is expressly permitted under the Rule.
• Consider how to handle the Rule’s notice requirement. As discussed above, the current uncertainties create a need to select from a range of difficult choices.
• Review existing non-solicitation and confidentiality clauses/agreements. Employers can obtain significant protections of sensitive information and significant relationships from well-tailored confidentiality and non-solicitation agreements. Employers should evaluate existing restrictive covenants with workers to determine whether these would provide sufficient protection of information, relationships, and hardwon goodwill if non-compete clauses become unenforceable. If such protections are not already in place, this is a good time to implement them. In addition, employers should be mindful whether such covenants could function as a noncompete and thus perhaps deemed unenforceable.
• Don’t forget the effect of state law. Many states (including Massachusetts and Maine), impose their own statutory restrictions on noncompete clauses. Employers need to make sure that any changes they make or new agreements that they put in place comply with applicable state laws.

Verrill’s Employment & Labor Group and Business Law Group are monitoring the status of the FTC Rule and will continue to provide updates on developments. If you have questions about the Rule and how it impacts your organization, or if you wish to discuss the “pros and cons” of possible next steps, please contact: Doug Currier (employment), Liz Johnston (employment), Greg Fryer (business law), or your lead Verrill attorney for assistance and guidance.