On April 23, 2024, the Federal Trade Commission—a U.S. agency empowered to fight deceptive and unfair commercial practices—issued a rule that would categorically bar noncompete agreements. The rule is scheduled to take effect September 4, 2024, but as discussed below legal challenges to the rule are mounting. Here is what Israeli companies need to know.
What Are the Legal Challenges to the Rule?
At least three lawsuits have been filed against implementation of the rule, in Texas, Pennsylvania, and Florida. Of these, one has already resulted in a preliminary injunction and stay of the rule's enforcement. In that case, Ryan LLC v. FTC, No. 3:24-CV-00986-E (N.D. Tex.), judge Ada Brown found that the FTC likely lacked statutory authority to make the rule. While this preliminary injunction and stay apply only to the plaintiffs in the case, the court's final ruling is expected by August 30, 2024, and may potentially enjoin or stay the rule throughout the entire United States. An initial decision in the Pennsylvania case is expected by July 23, 2024, while the Florida case lags further behind in ongoing briefing.
In addition to these specific challenges, another legal headwind for the rule is the Supreme Court's June 28, 2024 decision in Loper Bright Ents. v. Raimondo, No. 22-451, which eliminated the 1984 “Chevron” doctrine that called on courts to defer to agencies' interpretations of statutes they administer when the statutes are unclear. Courts will no longer give this interpretative deference to agencies, including the FTC. While Chevron has not been central to the legal challenges to the rule, it makes the FTC's defense of the rule somewhat more difficult.
Does the Rule Apply Outside of the United States?
The FTC's proposed rule includes jurisdictional limits in its definition of “non-compete.” First, noncompetes that limit “work in the United States” are banned. Second, noncompetes that limit a worker from “operating a business in the United States” are also banned. The text of the rule thus applies to employment and business in the United States. Indeed, the FTC's commentary explains that “the final rule's definition of non-compete clause clarifies that it applies only to work in the U.S. or operating a business in the U.S.” That is, the rule “does not apply to non-competes if they restrict only work outside the U.S. or starting a business outside the U.S.”
Are There Exceptions to the Rule?
The FTC's goal in developing the rule was to implement a “comprehensive ban” on noncompetes. The definitions of “business entity,” “employment,” and “non-compete clause” are thus broad and do not contain enumerated exceptions. Perhaps the biggest exception to the rule relates to “senior executives” subject to noncompetes before implementation of the rule. For such senior executives, noncompetes may still be enforceable after implementation. But for all other workers, the rule has retroactive effect, and following implementation of the rule all workers—including senior executives—are covered by the ban.
How Does This Affect My Company's Intellectual Property Protection?
It is important to note that the rule is not yet in effect and may well never take effect. But the battles around the rule's implementation are a good reminder to ensure intellectual property protections are strong. Specifically, companies should ensure that their employment agreements clearly vest ownership of all inventions, know-how, and other intellectual property in the employer. If an employee leaves for a competitor, such agreements may prove crucial. Further, companies should verify that they have rigorous onboarding and exiting policies for employees. When joining or leaving a company, employees should sign agreements confirming their knowledge of the employer's intellectual property policy, and should commit to not disclose any confidential information outside of the company—even after their employment ends. Finally, companies should assess whether their noncompetes comply with relevant state law. Regardless of whether the FTC's rule takes effect, states have varying legal approaches to the scope and enforceability of noncompetes. Complying with relevant state laws will remain vital even if the FTC's rule is never implemented.
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