On April 23, 2024, the Federal Trade Commission (FTC) issued a landmark final rule that effectively bans most non-compete agreements across the United States, with a few exceptions. See our original blog post about the FTC’s Rule here. This Rule, set to take effect on September 4, 2024, will render non-compete agreements unenforceable and prohibit employers from entering into new non-compete agreements with most employees. Employers are also required to inform current and former employees bound by existing non-compete agreements that these agreements will no longer be enforceable. However, non-compete agreements for senior executives (those earning over $151,164 annually and having significant policy-making authority) will still be enforceable. Additionally, the Rule does not apply to non-competes in genuine sale-of-business agreements or other restrictive covenants like confidentiality agreements, non-disclosure agreements (NDAs), and non-solicitation agreements.
Legal Challenges and Court Rulings
The FTC’s non-compete ban faced immediate legal challenges. Notably, Ryan LLC, a tax services firm, filed a lawsuit in the Northern District of Texas, and ATS Tree Services LLC, a tree care company, filed in the Eastern District of Pennsylvania. These cases were influenced by the Supreme Court’s decision in Loper, which overturned the Chevron doctrine. The Loper decision stated that courts should not defer to an agency’s interpretation of its rule-making authority when the underlying legislation is ambiguous. Instead, courts must independently determine if an agency, like the FTC, has acted within its statutory authority.
Shortly after the Supreme Court’s decision, the Texas federal court in Ryan ruled on the FTC’s non-compete ban. The plaintiff argued that the FTC’s actions were unlawful because the FTC (i) acted without statutory authority, (ii) exercised power unconstitutionally, and (iii) made arbitrary and capricious decisions. The plaintiff sought to stay the Rule’s effective date (September 4, 2024) and to preliminarily enjoin the FTC from enforcing the Rule. On July 3, 2024, the Ryan court partially granted the motion, preliminarily finding that (i) the FTC exceeded its statutory authority and (ii) that the Rule was arbitrary and capricious. Although this decision was preliminary, it is unlikely the court will change its stance in the final ruling which is expected at the end of August. In the final ruling, the court will also decide whether to extend the injunction nationwide or vacate the Rule under the Administrative Procedure Act (APA). Currently, the injunction applies only to the plaintiff and plaintiff-intervenors.
Conversely, on July 23, 2024, the Pennsylvania federal court in ATS reached a different conclusion. While adhering to the Supreme Court’s decision in Loper, the ATS court denied the plaintiff’s motion to stay the Rule’s effective date and refused to preliminarily enjoin the non-compete ban. The court found that the FTC did not lack substantive rulemaking authority, did not exceed its authority, and that Congress had not unconstitutionally delegated power to the FTC. The court noted that the FTC’s non-compete ban was consistent with previous FTC rulemaking that had been upheld.
Implications for Employers
The conflicting court decisions have left employers in a difficult situation. They might delay issuing the notices required by the Rule, hoping that the Texas court’s decision in late August will extend the injunction nationwide. However, if the Northern District of Texas keeps the injunction limited, employers nationwide will need to rush to meet the FTC’s September 4, 2024 deadline to notify employees currently under non-compete agreements. If the ban is enforced, the FTC can impose both equitable and monetary penalties for noncompliance.
Potential Actions for Employers
Given the evolving legal landscape regarding non-compete agreements, employers should consider several key actions:
- Identify Existing Non-compete Agreements: Identify employees and former employees subject to non-compete restrictions, including those under the senior executive exemption. This helps ensure compliance with state laws and prepares for future FTC rules.
- Proactively Prepare Notices: Prepare the contact list and notices for affected employees, and be ready to send the notices out once the Texas court reaches its final decision at the end of August. Also be sure to track the status of the Texas court’s decision so you can act promptly. Employers are highly encouraged to consult with legal counsel in drafting such notices and prior to sending the notices out.
- Check Applicable State Laws: Stay updated on state laws restricting non-competes. Some states, like California, Oklahoma, Minnesota, and North Dakota, already ban non-compete agreements, with limited exceptions. Other states have recently enacted new limitations or amended their non-compete statutes. The New York state legislature passed a bill that would have banned non-competes, but Governor Kathy Hochul vetoed it.
- Use Alternative Protections: The FTC rule does not prohibit other contractual provisions, such as non-solicitation, confidentiality, non-disclosure, and garden leave clauses, provided they do not function as de facto non-competes and comply with state laws. Focus on safeguarding trade secrets with tailored confidentiality agreements, proprietary information and inventions agreements (PIIAs), clear policies on the use of confidential information, and post-employment checklists and exit procedures.
- Address Worker Questions: Be ready to address questions from employees, applicants, and recruits about non-competes and existing agreements. Prepare talking points to address these concerns.
By taking these steps, employers can better navigate the uncertainties and ensure compliance with both federal and state regulations.
More Information
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Disclaimer
ALG does not make any representations or warranties, expressed or implied, as to the accuracy, completeness or fitness for a particular purpose of this or any article. This article is meant for general informational purposes only and should not be construed as, and does not constitute, legal advice. No one should take any action regarding the information in this article without first seeking the advice of an attorney. This article does not create an attorney-client relationship. No attorney-client relationship will exist with ALG or any attorney affiliated with it unless a written contract is signed by all parties and any conditions in such contract are satisfied.
