As most employers know, the Federal Trade Commission (FTC) adopted a controversial rule earlier this year that will prohibit virtually all noncompete restrictions (the “Non-Compete Rule”) as of its effective date, Sept. 4, 2024. The Non-Compete Rule is currently subject to several legal challenges asserting (among other things) that the FTC lacked authority to promulgate it, an argument foreshadowed by certain FTC commissioners during the April 2024 hearing on the Non-Compete Rule. So what do employers need to know about recent developments and the current status of the FTC Non-Compete Rule?
Overview of the Non-Compete Rule: The FTC Non-Compete Rule bans virtually all non-compete agreements for workers both proactively and retroactively, subject to certain very narrow circumstances (e.g., non-competes entered into with “senior executives”—as defined in the Non-Compete Rule—prior to Sept. 4, 2024 would remain in effect, as would restrictions entered into “pursuant to a bona fide sale” of a business entity either before or after Sept. 4, 2024). It also requires employers to notify current and former employees of the invalidity of existing non-compete provisions by the effective date of the Non-Compete Rule, Sept. 4, 2024. (For a more detailed discussion of the Non-Compete Rule, see our prior client alert.)
Legal Challenges to the Non-Compete Rule: There are several legal challenges to the Non-Compete Rule currently pending in federal court. These include Ryan LLC v. Federal Trade Commission, et al., pending in the United States District Court for the Northern District of Texas (Case No. 3:24-cv-00986-E); ATS Tree Services, LLC v. Federal Trade Commission, et al., pending in the U.S. District Court for the Eastern District of Pennsylvania (Philadelphia) (Case No. 2:24-CV-01743); and Properties of the Villages, Inc. v. Federal Trade Commission, pending in the U.S. District Court for the Middle District of Florida (Case No. 5:24-cv-00316-TJC-PRL). In each of these lawsuits, the plaintiffs seek injunctive relief to invalidate the Non-Compete Rule and, in the interim, delay the enforcement of the Non-Compete Rule pending determination of the merits of the claims.
Recent Developments: In the Ryan case, the federal court in Texas issued a Memorandum of Decision and Order (Docket No. 153) and Preliminary Injunction (Docket No. 154) on July 3, 2024. In a nutshell, the court found that the plaintiffs (Ryan LLC and the additional parties that had intervened in the matter—the Chamber of Commerce of the United States of America, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce) had met their initial burden of showing a likelihood of prevailing on the merits of their claims, including their claim that the FTC lacked authority to issue the Non-Compete Rule. The court therefore enjoined the FTC from enforcing the Non-Compete Rule with respect to the named plaintiffs only. The court indicated that, following further briefing, it intended to issue a ruling on the facts on or before Aug. 30, 2024, shortly before the Non-Compete Rule is scheduled to go into effect. (For a more detailed summary of the ruling in Ryan, see our recent client alert.)
What Does This Mean for Employers with Respect to the Non-Compete Rule? Essentially, the Ryan ruling means nothing for employers at present. While the court’s reasoning is very broad and applicable to employers nationwide, the preliminary injunction itself is circumscribed, limited to the named and intervening plaintiffs in that action. It thus has no impact on the enforceability of the Non-Compete Rule to employers generally.
What Can Employers Expect Going Forward? The Ryan court declined to apply the injunction beyond the named plaintiffs, citing the heightened standard that must be met to impose a nationwide injunction; however, the opinion does provide a detailed roadmap for other plaintiffs and courts to follow. There will be further developments in the Ryan case in connection with its disposition on the merits, and there will be decisions issued in the other pending cases that may assist employers. We anticipate that, based on the Ryan court’s reasoning, additional lawsuits will be filed. Congress and the president also may opt to take action at some point. In short, the battle will continue.
What Should Employers Do Now? Employers should, for the moment, assume that the Non-Compete Rule will be effective as of Sept. 4, 2024, and prepare for compliance, including the following:
- Identify non-compete provisions that extend beyond Sept. 4 for current and former employees. These may be included in employment agreements, documents governing equity interests, free-standing restrictive covenant agreements, settlement agreements and releases, severance pay arrangements, agreements entered into in connection with corporate transactions and other employment documents.
- Assess the validity of the non-compete restrictions. Review the non-compete provisions identified and, in conjunction with legal counsel, analyze whether they fall within one of the narrow exceptions detailed in the Non-Compete Rule.
- Be prepared to issue the required notices prior to Sept. 4. With respect to non-compete provisions that do not fall within an exception under the Non-Compete Rule, employers should be prepared to issue the required notices in advance of September 4. (As noted above, the Non-Compete Rule requires that the notices related to unenforceable non-compete provisions must be provided to the affected individuals by the effective date of Sept. 4.) Given the possibility that the Non-Compete Rule could be invalidated, it makes sense to wait until closer to the deadline before actually issuing the notices.
- Analyze what changes would be needed to existing agreements. Review existing agreements and determine what modifications would be needed to comply with the Non-Compete Rule (i.e., eliminating unlawful restraints on competition), as well as what revisions might be appropriate to more fully protect trade secrets, goodwill and other company assets. Employers also should consider how those changes could be made; for instance, can the changes be made unilaterally, or will contracts need to be amended, and if the latter, will additional consideration be needed to do so?
- Consider whether additional protections are needed for “senior executives.” As noted above and in our prior client alert, non-compete agreements in effect prior to Sept. 4, 2024 with “senior executives"—i.e., workers earning more than $151,164 annually who are in policymaking positions—will remain enforceable. Employers would be well-advised to review existing agreements with senior executives and determine whether updates are needed prior to the Sept. 4 effective date of the Non-Compete Rule.
- Adjust employer practices going forward. Ensure that key personnel are staying apprised of the status of the Non-Compete Rule as it may change prior to the effective date. Employers also should be proactive in preparing to adjust their policies, practices and documentation in advance of the deadline.
