As previously covered on our HR Law Talk blog, the Federal Trade Commission’s (FTC) non-compete ban (FTC Rule or the Rule) is scheduled to take effect on September 4, 2024. Issued in April, the FTC Rule prohibits all non-competes arising out of employment relationships – with the exception of existing agreements with “senior executives,” as defined by the Rule. Although many legal experts have hypothesized that the federal courts would enjoin the Rule, the future of the FTC Rule remains uncertain. Accordingly, employers must remain informed on the most recent court rulings involving the FTC Rule and prepare as though it will take effect on September 4.
On July 3, the U.S. District Court for the Northern District of Texas enjoined the FTC from enforcing the FTC Rule, finding the FTC did not have the authority to issue such a rule. However, the Northern District of Texas’s injunction did not apply nationwide, but rather only to the litigants in that lawsuit. Despite this narrow ruling, the court left open the possibility that it might issue a nationwide injunction if additional information suggested that such relief was necessary. The court indicated that it would issue a final ruling by August 30, 2024. Similarly, on August 15, the U.S. District Court for the Middle District of Florida enjoined the FTC from enforcing the FTC Rule, but only against the plaintiff in the lawsuit.
On the other hand, on July 23, in a matter considering the FTC Rule before the U.S. District Court for the Eastern District of Pennsylvania, the court denied a motion for a preliminary injunction, finding that the FTC did have authority to issue the Rule prohibiting most non-competes. Based on these seemingly conflicting rulings in Texas and Pennsylvania, employers are understandably unclear on whether the FTC Rule will take effect and, if so, how to adhere to it.
What Should Employers Do Now?
Under the FTC Rule, employees with non-competes – with the exception of senior executives – must be informed by September 4, 2024, that their non-competes will not be enforced. Therefore, a threshold determination for employers is which of their employees qualify as “senior executives.” The FTC Rule defines a “senior executive” as a worker who is in a policy-making position and is compensated at least $151,164 per year.
“Policy-making position” is defined as one of the following:
- An employer’s president, CEO, or the equivalent.
- Any other officer with policy-making authority (as defined by the FTC Rule).
- Any other person with policy-making authority for an employer similar to an officer with policy-making authority.
For example, in the FTC Rule’s commentary, the FTC acknowledges that “partners in a business, such as physician partners of an independent physician practice, would also generally qualify as senior executives . . . assuming the partners have authority to make policy decisions about the business.” On the other hand, employed associate physicians and physicians who are titular owners of practices in a management services organization (MSO) model would likely not qualify as “senior executives” assuming that they lack of “policy-making authority,” just as many executives below the C-suite level may not qualify as having a “policy-making position” notwithstanding their level of compensation.
Although the September 4 deadline applies to all employees covered by the FTC Rule, employers should take this opportunity to reassess whether their existing non-competes are necessary to protect legitimate business interests.
To best comply with the FTC Rule, an employer should assess whether a court would deem an employee’s non-compete reasonably necessary to protect the employer’s legitimate business interests. As an example, courts often find that confidential company information or significant customer relationships represent legitimate business interests for an employer to protect with a non-competition agreement. However, in instances involving administrative staff or other non-salespeople who do not 1) have access to confidential company information, or 2) maintain significant customer relationships, a court will likely find the non-compete unnecessary to protect the employer’s business interests. For these employees, if a federal court does not issue a nationwide injunction prior to September 4, employers should prepare notices informing them that their non-competes will not be enforced. These notices must be delivered by hand, by mail to the last known street address, by email, or even by text message. The FTC regulations state that employers with no record of address, email or cell number are excused from the notice requirements. For these employees, we recommend the notice contain the Model Language provided in the FTC Rule, found here.
Even for those employees whose positions are of such a nature that a court would likely find a protectable interest to be implicated when assessing the enforceability of a non-compete – such as salespeople with significant customer relationships or senior leadership with access to sensitive, confidential information – notices are still required under the FTC Rule. With that said, employers could choose to diverge from the Model Language and provide an alternative notice to employees in which the employer reserves all rights to challenge the FTC’s authority. For example, employers could consider using the following language:
As you may have heard, the Federal Trade Commission (FTC) has issued a rule indicating that non-compete covenants in the employment context are not enforceable for most employees (excluding senior executives as defined by the Rule) as of September 4, 2024. The FTC also has informed companies that they must put those employees subject to such restrictions on notice of this FTC ruling and that their non-compete will not be enforced. However, the Company believes that the FTC does not have the authority to issue such a broad-brush prohibition of non-compete agreements and/or require such a notice, and at least one federal court has ruled that the FTC does not have authority to issue such a rule.
Thus, while we are putting you on notice of the FTC’s Rule, we also are informing you that the Company does not intend to waive any rights to object to the FTC’s authority to issue such a rule and if you engage in conduct that would violate your non-compete agreement, the Company is reserving all rights to enforce its agreement restricting you from engaging in those activities prohibited by your non-compete agreement. Please also note that the FTC Rule does not generally apply to non-solicitation or confidentiality agreements, which the Company will also continue to enforce, nor does it apply to non-competes that do not arise from the employment relationship, such as non-competes arising in the context of ownership independent of an employment relationship or the sale of a business.
Before diverging from the Model Language, employers should understand that this alternative language has not been tested and may be deemed non-compliant with the FTC Rule. Please also note that this alert does not constitute legal advice. The application of the FTC Rule and the language of the notice necessary for each employer will vary based on the facts and circumstances surrounding the employer’s non-compete agreements, as well as the terms and conditions set forth in such non-compete agreements.
This is also an ideal time for companies to examine their equity-related non-competes to ensure that they are not drafted in a manner that could lead the FTC to conclude that they arise from the employment relationship. For example, equity-related non-competes would ideally have a tail period that is triggered when the individual ceases to be an equity owner as opposed to when the individual stops being an employee of the company.
As the September 4 deadline approaches, we will continue to monitor developments relating to the FTC Rule. Should the Northern District of Texas or any other court issue a broader injunction of the FTC Rule, we will provide updated analysis of the FTC Rule landscape.
