The Federal Trade Commission's (FTC) final rule that makes most noncompete agreements unenforceable, with a few exceptions, has been the target of significant litigation in recent months. The prohibition on noncompetes is inapplicable to certain industries, such as airlines, financial services, and non-profits, and to existing agreements with "senior executives." The final rule defines senior executives as people earning more than $151,164 annually who are in a "policymaking position."
The final rule also impacts nondisclosure and nonsolicitation agreements to the extent that they function like noncompete agreements. It supersedes state law, but not if the state law is stricter than the rule.
As the rule is set to go into effect on September 4, 2024, employment attorneys and legal experts are awaiting two separate court decisions. First, the U.S. District Court for the Northern District of Texas recently issued an injunction prohibiting the final rule from going into effect, but only to the named plaintiffs in that lawsuit. The injunction has no nationwide effects and does not prevent the FTC rule from going into effect for others. However, the Court intends to issue a ruling on the case's merits by August 30, 2024, only days before the FTC rule is supposed to go into effect.
The U.S. District Court for the Eastern District of Pennsylvania is considering a similar lawsuit. The Court indicated it would issue its ruling by July 23, 2024.
As a result, employers should know more later this summer about whether the FTC's final rule on noncompetes will go into effect in September as planned. Until then, employers should hold off on taking compliance measures with the final rule and continue monitoring the pending litigation. However, it is widely expected that the court decisions, whatever the outcome, will face further appeals and resolution before the U.S. Supreme Court.
Nevertheless, employers should prepare for the possibility that the final rule may go into effect on September 4th as planned. Therefore, employers should review all existing noncompete agreements and determine whether any fall within the "senior executive" exception. Employers also should review their noncomplete agreement policies and redraft, if necessary, to comply with the new rule. Employers should compile a list of names and contact information for current and former employees impacted by the final rule so that they can easily send notices pursuant to the rule if needed.
Finally, employers should draft potential revisions to their existing restrictive covenants to ensure that they do not violate the final rule. They should determine the best way to protect business interests through other mechanisms, such as properly tailored nonsolicitation, nondisclosure, or retention agreements. Alternatively, employers may wish to change access policies to better protect proprietary materials and trade secrets from some employees.
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