The Federal Trade Commission (“FTC”) made waves on April 23, 2024, when it issued a final rule that (1) voids existing non-compete agreements, with two exceptions; and (2) prohibits employers from entering into new non-compete agreements, with one exception (the “Final Rule”). With regard to existing non-competes, those with “senior executives”—defined as directors, officers, or other workers in policy-making positions who earn more than $151,164 annually—created before the Final Rule’s effective date remain in force. Second, the Final Rule does not apply to causes of action predicated on breaches of existing non-compete agreements that accrued prior to the Effective Date. With regard to new non-competes, the Final Rule will not apply to those created pursuant to a bona fide sale of (1) a business entity, (2) a person’s ownership interest in a business entity, or (3) all or substantially all of a business entity’s operating assets. The Final Rule applies nation-wide and is set to take effect 120 days after it is published in the Federal Register, which has not occurred as of the date of this publication (the “Effective Date”).
But employers shouldn’t panic. At least, not yet. The Final Rule may be delayed—if not invalidated entirely—by the litany of court challenges that have ensued since it was issued. For example:
- On April 23—the very same day that the Final Rule was issued—the first challenge was lodged in the Northern District of Texas, Dallas Division. It was filed by Ryan, LLC, a company representing itself as “a global tax services firm that provides an integrated suite of federal, state, local, and international consulting services to corporate clients to liberate them from the burdens of over-taxation.”*
- The very next day, on April 24, the U.S. Chamber of Commerce and other business groups filed their own challenge to the Final Rule in the Eastern District of Texas, Tyler Division.**
- On April 25, a third lawsuit was filed by a tree service company in Pennsylvania called ATS Tree Services, LLC.***
While there are slight differences in the plaintiffs’ approaches, arguments, and theories, all three lawsuits argue that the Final Rule unlawfully exceeds the FTC’s rulemaking authority and is an “arbitrary and capricious” exercise of the FTC’s powers. Eventually, the rulings will not only affect whether and when the Final Rule becomes effective, but they could also impact the scope of the FTC’s rulemaking authority more broadly.
Because the contours and ultimate effect of the Final Rule will not be known for some time, employers who regularly utilize non-competes do not need to jump to action just yet. They should, however, begin to consider some alternatives. The Final Rule reflects a growing, national trend towards limiting or even voiding non-compete agreements altogether. Even if it never takes effect, it likely foreshadows the legal landscape of the future. (Indeed, the Final Rule appears to align with existing state law in California, North Dakota, Oklahoma, and Minnesota, all of which prohibit non-compete agreements to one degree or another.) Thus, employers would be wise to review existing non-compete agreements to determine whether they meet the more rigorous standards that courts are increasingly applying when determining their enforceability. One adverse ruling against a particular non-compete agreement could spell doom down the road for any other such agreements used with that employer’s workforce.
There are also a number of alternatives to non-competes that employers can turn to in order to achieve the same practical results. For example:
- Non-Solicitation Agreements. The Final Rule clarifies that non-solicitation agreements preventing former employees from soliciting their former employers’ customers and/or recruiting other employees are not prohibited. Thus, employers should consider robust non-solicitation agreements to prevent exiting employees from taking customers and employees. Such agreements will be permitted under the Final Rule, as long as the restrictions do not operate to prohibit the worker from seeking or accepting new employment or operating a business at the conclusion of employment.
- Non-Disclosure Agreements. Trade secret laws and confidentiality/non-disclosure agreements remain enforceable, and businesses can still require employees to maintain confidentiality regarding trade secrets or other sensitive business information. Companies can also continue to protect their proprietary know-how and assets through intellectual property law, such as patents, copyright, trademarks, etc.
Thus, while there is not yet cause for panic, employers should begin to carefully consider their options with regard to existing non-competes—including potential alternatives for achieving the same practical results—in order to comply with this new legal landscape. Porter Hedges’ labor and employment team is experienced at navigating the nuances and developments of non-compete law and is available to assist. For questions please contact a member of our team.
* Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-00986-E (N.D. Tex. Apr. 23, 2024), at ECF No. 1, ¶ 11.
** Chamber of Commerce of the U.S.A., et al. v. Federal Trade Commission, et al., No. 6:24-cv-00148 (E.D. Tex. Apr. 24, 2024), at ECF No. 1.
*** ATS Tree Services, LLC v. Federal Trade Commission, et al., No. 2:24-cv-01743 (E.D. Pa. Apr. 25, 2024), at ECF No. 1.
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