On May 7, 2024, the Federal Trade Commission (“FTC”) published its final rule (the “Rule”) broadly banning most noncompete provisions in employment-related agreements and preventing employers from enforcing them. The Rule takes effect on September 4, 2024, assuming it survives the legal challenges it is facing in federal courts.

We previously wrote details about the Rule, which you can find here.

Legal Challenges:

As expected, several businesses and interested parties swiftly brought lawsuits to invalidate the Rule and to obtain injunctive relief preventing it from going into effect. So far, the challenges have been met with little success; however, one court signaled that it may indeed invalidate the Rule. A further discussion of the challenges follows.

Challenge in Pennsylvania

Another challenge to the Rule was filed by a private employer in Pennsylvania (ATS Tree Services, LLC v. Federal Trade Commission, 2:24-cv-01743 (E.D. Pa. 2024). On July 23, the ATS court denied plaintiff’s motion to stay the Rule’s effective date and for a preliminary injunction finding that the plaintiff failed to establish irreparable harm based only on having to comply with the Rule, and failed to establish a likelihood of success on the merits. It is not clear by when the Ryan court will issue its final ruling on the merits and render a decision on summary judgment.

Two Challenges in Texas

On April 23, 2024, the same day the Rule was announced, Ryan Air LLC, a small private employer in Texas, filed suit against the FTC (Ryan LLC v. Fed. Trade Commission, 3:24-cv-00986 (N.D. Tex. 2024)). The next day, the Chamber of Commerce and other business entities also filed suit against the FTC in Texas. In each case, the plaintiffs made substantially similar arguments, including that the FTC lacks statutory authority to enact substantive rules related to unfair methods of competition, the Rule is “an unconstitutional exercise of power,” and that the FTC’s actions were arbitrary and capricious because the Rule is unreasonably overbroad without a reasonable explanation or evidence.

On July 3, 2024, the Ryan court granted a preliminary injunction enjoining the enforcement of the Rule, but limited the relief to only the five parties in the case. The Ryan court, however, questioned the Rule’s validity, finding that: (a) the FTC lacks substantive rule-making authority with respect to unfair methods of competition: (b) the Rule is arbitrary and capricious because it is overly broad without explanation; and (c) the plaintiffs are likely to succeed on the merits. The Ryan court also stated that in some ways the preliminary injunction standard is higher than one for a permanent injunction (which is the next phase of the litigation) because preliminary injunctions are ruled upon before a full hearing on the merits.

The plaintiffs in Ryan sought nationwide relief, but the Court declined, finding that plaintiffs failed to sufficiently argue why a nationwide injunction is necessary and did not sufficiently brief (or argue) this point. Seemingly, accepting the Court’s invitation for more extensive briefing on the scope of the injunction, the plaintiffs moved for nationwide relief on July 19, 2024. The Ryan court has stated it intends to issue a decision on the merits of the case, including the motions for nationwide relief, on or before August 30, 2024.

Challenge in Florida

A private employer filed a lawsuit in Florida on June 21, 2024 to invalidate the Rule (Properties of the Villages, Inc. v. Federal Trade Commission, 5:24-cv-00316 (M.D. Fla. 2024). Unlike in the two other cases, there have not been any rulings in this case yet.

Dead or Alive?

As of now, the Rule will take effect on September 4, 2024 and apply to all employers covered by the Federal Trade Commission Act other than the Ryan plaintiffs. FTC’s noncompete ban will take effect as scheduled on September 4.

Regardless of the outcomes in any of these litigations, which have yet to decide on whether to issue a permanent injunction, appeals seem inevitable. A split (or different rulings in the different jurisdictions) may make its way to the Supreme Court of the United States. Accordingly, uncertainty about the ultimate fate of the Rule remains.

What Should Employers Do Now?

Even if the Rule is not upheld, the legal landscape, public opinion and employee negotiations of restrictive covenants are increasing. For example, several states have recently enacted legislation preventing or curtailing the use of post-employment noncompetes and many bills are pending. Presumably, state legislatures have paused efforts to pass state law as we all wait to see the fate of the FTC Rule. This presents a great opportunity for employers to review and update their current restrictive covenants whether the Rule is ultimately upheld or not.

• Identify workers with restrictive covenants. Employers should identify each worker (which includes independent contractors and consultants) with restrictive covenants, including not only noncompetes, but also client and employee nonsolicits and confidentiality and nondisclosure agreements. As discussed in our prior note, these other restrictive covenants may come within the Rule’s noncompete definition as “functional noncompetes” and may be subject to similar scrutiny under state law.
• Applicable Jurisdictions. Employers should also identify the jurisdiction in which the worker with the restrictive covenants work and review state and local statutes and case law to determine whether any updates are needed.
• Make sure noncompetes are narrowly tailored. Employers should ensure that their restrictive covenants are not overly broad, but rather, are narrowly tailored to protect their legitimate interests. It behooves employers to analyze business risks and concerns and to address only those via restrictive covenants. For example, perhaps noncompetes are only needed for certain high-level executives or key salespeople. Perhaps three or six months rather than eighteen months is a sufficient duration. Likewise, perhaps a robust nondisclosure and confidentiality agreement is sufficient to protect the employer’s interests. Even nonsolicits should be narrowly tailored; for example, they should only apply to clients with whom the employees had contact and/or about whom they had access to confidential or proprietary information.
• Consider alternatives. Employees should consider alternatives to noncompetes to keep employees, such as stay or retention bonuses or “garden leave” (which is a paid notice period imposed on the employee who resigns).
• Prepare in the event the Rule takes effect:
  • Identify the “Senior Executives”. As discussed in our prior note, noncompetes entered into with “Senior Executives” prior to the September 4, 2024 effective date are not banned by the Rule. Thus, employers may want to notify the employees whom they consider “Senior Executives” of their status, thereby alerting them that their employer considers their current noncompetes in effect.
  • Prepare written notices. Employers may want to prepare written notices to employees who currently have non-compete provisions informing them that the provisions will not be enforced. The Rule provides a sample notice and specifies that workers are notified by personal hand delivery, mail, mail, or text message.