On April 23, the Federal Trade Commission (FTC) issued its Final Noncompete Clause Rule in which the FTC essentially banned all employment noncompetes with two narrow exemptions: (i) existing noncompetes with “senior executives” (executives who have the final say on policy decisions that significantly impact the business and who earned at least $151,164 in total annual compensation from their employer in the preceding year) and (ii) noncompetes in the context of the sale of a business. The FTC’s noncompete Final Rule is scheduled to go into effect on Sept. 4, when employers will be required to send a written or electronic notice to current and former employees informing them that their noncompetes will no longer be enforceable. This Clark Hill Client Alert discusses the chaotic status of the FTC Final Rule and potential strategies given its impending Sept. 4 effective date.
Judicial Attacks on the FTC Rule
Within days of the issuance of the FTC’s Final Rule, lawsuits were filed in federal courts. These lawsuits asserted, among other things, that the FTC exceeded its authority in attempting to ban employment noncompetes and that the FTC’s Final Rule was arbitrary and capricious. Most of the lawsuits sought a stay of the Final Rule’s enforcement date and a nationwide injunction to preclude enforcement of the FTC’s ban on noncompetes. On July 3, a federal district court in Texas issued the first ruling on the FTC’s Final Rule, finding it fatally flawed and granting a preliminary injunction enjoining enforcement of the FTC’s Final Rule. Rather than entering a nationwide injunction, the Texas federal court merely held that FTC’s Final Rule was unenforceable only against the plaintiffs in the case (which included the U.S. Chamber of Commerce, though not its members), pending a final decision on the merits on or before August 30, 2024.
There is also an action pending in federal court in Florida, attacking the FTC Rule, but no decision from the Florida court appears imminent.
A federal court in Pennsylvania was the second one to consider the FTC Final Rule. The judge there issued a ruling that was diametrically opposite from the decision by the federal court in Texas. On July 23, the Pennsylvania federal court judge opined that the FTC has the authority to issue a nationwide ban on noncompetes, the ban was not arbitrary or capricious, and, therefore, the judge refused to issue a preliminary injunction to halt enforcement of the FTC’s Rule.
Whether or how the Pennsylvania court’s decision will affect the Texas court’s upcoming ruling on the merits, which is expected on or before Aug. 30 remains to be seen. As things stand now, there is a split between two district courts on the enforceability of the FTC’s ban on noncompetes. There will almost certainly be appeals to the Third Circuit and the Fifth Circuit, which may result in more conflicting rulings, though probably not before the FTC Rule goes into effect. Ultimately, the U.S. Supreme Court will likely decide the fate of the FTC ban on noncompetes, but when is unclear.
Potential Strategies for Employers with Noncompetes
In the meantime, what are employers who have noncompetes with current and former employees doing about the FTC’s ban on noncompetes? So far, three approaches have emerged:
Ignore it. Some employers are choosing to ignore the FTC Rule because it is likely to be struck down. One problem with this strategy is that there may be no definitive judicial ruling on the FTC Rule until after it goes into effect. Ignoring the Rule after it goes into effect risks actions by the FTC, employees, and even the National Labor Relations Board (which also opposes noncompetes).
Prepare but wait. Other employers are choosing to review their employees’ noncompetes now to see which employees fit into the “Senior Executive” exemption under the FTC Rule and then they are preparing the notice required by the Rule to be sent to their remaining (current and former) employees with noncompetes that will be invalidated if the Rule goes into effect. However, they are waiting to see what happens to the Rule in the courts before they send out any notices. In that way, they can then be ready to act should the FTC or the Rule require those employers to do something. In their notices, some employers are reiterating that any nonsolicitation language in their employees’ agreements will remain enforceable while stating that the noncompete language is no longer valid and will not be enforced.
Comply. Some other employers are simply preparing to comply with the FTC Rule if it goes into effect on Sept. 4. In doing so, these employers will not have to worry about actions by the FTC and/or employees seeking declarations that their noncompetes are invalid. The downside risk to this strategy is that if the Rule is eventually struck down, these employers will have to try to rescind the notices they sent out to current and former employees pursuant to the Rule.
Effect on Pending Litigation
For those currently litigating noncompete agreements there is an express carveout in the final rule for causes of action that accrue before the effective date under Section 910.3(b). If an employer has a noncompete lawsuit pending, it should not be affected. If the FTC Rule goes into effect, whether or not it will be interpreted to allow new lawsuits to be filed for causes of action that accrued before the Rule went into effect is less clear.
