Background: The Federal Trade Commission (FTC) issued an extremely broad Final Rule banning most non-competes. As expected, there have been multiple court challenges to the Final Rule, but, to date, no court has issued a nationwide injunction preventing the Final Rule from going into effect, as scheduled, on September 4, 2024. Judge Ada Brown of the Northern District of Texas has indicated, however, that she intends to issue a decision on the merits on or before August 30, 2024.
The Final Rule includes language requiring that employers provide an individualized notice to each worker subject to a non-compete prohibited under the Final Rule. According to the Final Rule, these notices must state that the employer will not enforce the prohibited non-compete and that it is illegal. With no injunction currently in place, employers need to start assessing whether this notice requirement applies to their contracts so they are ready in the event that Judge Brown decides not to enjoin the Final Rule.
If no nationwide injunction delays the Final Rule, employers
should be prepared to issue a notice to affected employees no later
than September 3, 2024. Employers should consider doing the
following now in case Judge Brown either does not rule by September
3, 2024 or does not issue an nationwide injunction:
- Determine if the FTC ban covers your industry. For example, it does not cover not-for-profits (as specifically defined by the FTC), banks, insurance companies, transportation and communication common carriers, air carriers as well as some other entities.
- Determine which workers are exempt from the notice. Senior Executives, defined as workers earning more than $151,164 and who are in a policy-making position, are generally exempt. Other non-competes entered into as part of the sale of a business may also be exempt.
- Compile a list of current and former workers who are currently subject to a non-compete. This includes independent contractors or anyone else who worked for your business and signed a non-compete, including any non-competes signed in stock agreements and the like. If these workers are subject to a non-compete, the Final Rule requires them to receive the notice, even if they no longer work for the company.
- Determine the language of the notice. Employers may want to develop language allowing the company to adjust its position should the ban come after September 4, 2024. In other words, the company does not want to have to reissue all new contracts because it inadvertently invalidated or rescinded its existing contracts by issuing the notices. Rescission is not required by the Final Rule, but no one knows how a court will later rule on the legal effect of sending the notice and then reactivating the same agreement later without a new signature.
- Determine how to deliver the notice. The notice may be sent by mail, hand-delivery, email or text. Note that notice must be received before the effective date. Therefore, if you are waiting until the last minute, you will need to send electronic notice via email or text. If you are sending via mail or by hand delivery, you should create a process for documenting delivery.
- Understand the difference between a non-compete, a non-solicit and a non-hire provision. Many non-competes are labeled "non-competes" that are not in the nature of what the Final Rule bans. Narrowly constructed non-solicitation of customer clauses are not banned, but they are often included in a paragraph labeled "non-compete." Even stand-alone non-solicitation clauses are sometimes labeled "non-compete." Understand what activities your business has included in the "non-competition" provision because you might not actually need to send the notice, and if you are required to send the notice consider sending an explanation of what is not going to be enforced and what remains that you will enforce.
- Consider the human side of this issue. Non-competes are a hot button issue for workers. Workers do not like them. Regardless of what happens regarding the Final Rule (enjoined or not), you should consider explaining to your workers why non-competes are necessary for the viability of your business and their jobs. You should especially consider providing an explanation if you are forced to send a notice that says essentially, "we are sending this notice because we have to, but if the Final Rule is overturned, we will continue to enforce the non-compete."
- Do not just adopt the Sample Notice you find online. Consult with your counsel before preparing the right notice for your situation.
- Come up with a plan for what agreements you are going to put in place for new employees who join the company after September 3, 2024, if the Final Rule is not enjoined. You should be reviewing your non-solicitation of customers and non-solicitation of employee covenants to determine if they are narrowly tailored to protect your confidential information and other legitimate business interests. You should also review your confidentiality and return of company property language and make sure you have in place procedures to ensure your confidential information is protected when employees depart, such as a use of termination certifications. We expect increased scrutiny over all restrictive covenants by the Courts.
There is no private right of action against an employer under the new Final Rule but that does not mean that you should ignore this deadline. If your business fails to provide the notice, workers may report the company to the FTC. This means the FTC may engage in an investigation and pursue enforcement action, possibly including civil penalties. Further, if the company tries to enforce a prohibited non-compete, the Final Rule, while in effect, operates as a bar to enforcement. Providing a worker the notice and then "taking it back" (in the event the Final Rule is stayed) is a potential PR nightmare for employers. You should carefully consider your messaging on this topic and be prepared to explain why non-competes are important to your business.
The Bottom Line
With the effective date of the FTC final rule quickly approaching and no promise that any court will issue a nationwide injunction, employers with noncompetes should be prepared to issue the required notices to all applicable workers with noncompetes by September 4, 2024. Doing some preparation now will make this Labor Day weekend a much less laborious one for employers.
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.