Employers, Your Attention Please! An Update On The FTC Worker Non-Compete Rule

As we previously reported, the U.S. Federal Trade Commission (FTC) issued a Final Rule which, as of its effective date (set for September 4, 2024), would ban (as "unfair methods of competition") virtually all employers from:

• As of the effective date, entering into or attempting to enter into "non-compete clauses" with any workers, including those that qualify as "senior executives" (discussed below),
• Enforcing or attempting to enforce any "non-compete clauses" with any workers except those with "senior executives" before the effective date,
• Representing that any non-"senior executive" worker is subject to a non-compete clause, and
• Representing that a "senior executive" is subject to a "non-compete clause" where that clause was entered into on or after the effective date.

As we had anticipated, the FTC Rule has faced legal challenges, including a lawsuit filed by Ryan LLC (and joined in by other parties) in the United States District Court for the Northern District of Texas. In that lawsuit, Ryan LLC v. Federal Trade Commission, on July 3, 2024, the Court issued a preliminary injunction that temporarily enjoins the FTC from implementing and enforcing the FTC Rule, but only as against Ryan LLC and the other plaintiffs in that suit. The July 3 ruling provides no relief from the FTC Rule for anyone else. However, the Ryan court has stated that it plans to issue an updated ruling on the plaintiffs' request for a preliminary injunction by no later than August 30, 2024. In that upcoming ruling, it is possible that the Ryan Court will issue an injunction that applies to all employers nationwide. Until then, uncertainty abounds, and time is running short.

What Employers Should Do Now

Given the imminent September 4 effective date and the uncertainty of a universal preliminary injunction ruling in Ryan, now is the time for employers to prepare for the FTC Rule's requirements.

In addition to the recommendations made in our prior article (see "What Should Employers Do Now?"), we recommend that all employers strongly consider doing the following:

• Retain Knowledgeable Legal Counsel
• Gather and Review Applicable Agreements, and Strategize with Counsel
  • Employers should gather and review all agreements with any current or recently departed workers and determine whether they include any clauses that could be construed as a "non-compete clause" under the FTC Rule.¹
  • If so, employers should:
    • Share copies of each of those agreements with counsel for review,
    • Prepare a list (including contact information) of all current workers subject to those clauses, as well as any recently departing workers as to whom the "non- compete clause" restrictive period may be in effect, and
    • Determine with counsel which of these persons would need to receive a "notice"² under the FTC Rule.
• Prepare Revised Agreements and Prepare FTC-required Notices (but do not pull the trigger yet)
  • If they have not already done so, employers should work with counsel to prepare revised agreements for prospective use vis-à-vis workers that would be deemed in compliance with the FTC Rule if it takes effect.
  • If it is determined that the employer is required under the FTC Rule to provide notice to any person as to any "non-compete clauses," the employer should have counsel prepare an appropriate notice to be sent to all persons who are entitled to notice under the FTC Rule.
  • The FTC Rule contains a suggested form of notice that if used, will provide a "safe harbor" in terms of compliance with the notice requirement. However, employers and their counsel should thoughtfully consider whether using that form of notice is in their best interests, especially given that the courts could later find the FTC Rule is invalid. For example, if the FTC "safe harbor" notice is sent without qualification to employees and the FTC Rule is later invalidated, will the employer be able to "put the toothpaste back in the tube" and revive the subject non-compete clauses?

• Mark your Calendars, Be on the Alert for a Ruling in Ryan, and Be Prepared to Implement Your Strategy
  • As mentioned above, another ruling from the Ryan court is expected by August 30.
  • Employers need to stay informed and be prepared to implement their strategy by September 4 as may be needed to comply with the FTC Rule if its effectiveness is not enjoined before such date.

Footnotes

1. Under the Final Rule, a "non-compete clause" means a "term or condition of employment that prohibits a worker from, or penalizes a worker for, or functions to prevent a worker from" either (a) seeking or accepting work with a different employer where such work is to begin after the conclusion of the employment that includes the term or condition, or (b) operating a business after the conclusion of the worker's employment with the employer.

2. By the FTC Rule's effective date, employers are required to provide a clear and conspicuous written notice to employees whose pre-Effective Date "non-compete clauses" are banned by the Final Rule that such clauses are unenforceable and will not be enforced.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.