The Federal Trade Commission's new rule that prohibits most employment-based noncompete clauses is scheduled to take effect on Wednesday, September 4, 2024. The rule provides that all existing contract clauses that purport to prohibit an employee or independent contractor from working for another person or starting a new business after he or she leaves employment are unlawful, with the exception of such clauses in agreements with "senior executives" in a "policy-making position" earning at least $151,164 per year. In addition, the rule would prohibit employers from entering into such agreements with all employees and independent contractors after the effective date, including senior executives. The new rule does not prohibit confidentiality/non-disclosure provisions, nor does it invalidate post-employment restrictions on soliciting or servicing the former employer's customers or employees, although those types of restrictions may be affected by various state laws. In addition, the rule does not apply to equity-based noncompetes, as are common in sale of business or stock/equity ownership agreements.
In addition, the rule requires employers who have such agreements with employees to notify them in writing, on or before the effective date, that the noncompete clause "will not be, and cannot be, legally enforced against the worker."
Pending litigation involving directly contradictory rulings leaves the fate of the rule in a state of uncertainty, however.
On July 3, 2024, Judge Ada Brown of the Northern District of Texas issued an injunction enjoining the rule, finding that it was likely that the plaintiffs could prove that the FTC exceeded its statutory authority in issuing this new rule. Judge Brown limited the injunction to the parties in the case, however, and did not issue a nationwide ban, meaning that it is likely that her ruling does not preclude the FTC from enforcing the rule against other parties starting on September 4. (Ryan LLC v. Federal Trade Commission, N.D. Tex., 3:24-cv-00986.)
Then on July 23, 2024, Judge Kelley Brisbane Hodge of the United States District Court for the Eastern District of Pennsylvania denied a similar injunction request, finding that the plaintiff failed to establish that the FTC exceeded its authority. ( ATS Tree Servs. LLC v. Federal Trade Commission, E.D. Pa., 2:24-cv-01743.) In other words, Judge Hodge determined the rule is lawful and can go into effect as scheduled.
Earlier today, Judge Timothy Corrigan of the United States District Court for the Middle District of Florida issued an injunction enjoining enforcement of the new FTC rule against the plaintiff in that case. Like Judge Brown, Judge Corrigan found that the plaintiff was likely to succeed on its claim that the FTC lacked statutory authority to adopt and enforce the rule, but he opted not to stay the rule entirely. (Properties of the Villages, Inc. v. Federal Trade Commission, M.D. Fla., 5:24-cv-00316.)
Significantly, Judge Brown has promised a final ruling on the merits of the Texas case by the end of August. If she issues a nationwide injunction or stay of the rule at that time – which is possible but not expected – then the rule's enforcement will likely be delayed pending appeal. If she does not issue a nationwide injunction, then the rule will likely become effective on September 4, although the potential for other litigation to stay or modify the rule remains possible.
In the meantime, employers should evaluate their current agreements with their employees and independent contractors to determine whether those agreements may be impacted by this rule and which clauses in particular may become unlawful. Employers should determine which employees qualify as "senior executives" under the rule, as those executive noncompetes will not be adversely affected. Employers should also be prepared to send written notices to non-senior executive employees subject to such provisions advising them that the noncompete restrictions will not be enforced beginning September 4.
Because of the potential that the rule may be invalidated prior to the effective date, employers should closely monitor the situation and send the notices as close to September 4 as possible. In their notices, employers may also consider adding a caveat that the company reserves the right to notify employees of its intent to enforce these provisions in the future if the law changes after the rule takes effect.
Lastly, in the event that the law takes effect on September 4 as scheduled, employers should be prepared to remove noncompete language, but not other restrictive covenants, from any agreements entered into with employees or independent contractors on and after that date.
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