*8/21 Update The United States District Court for the Northern District of Texas ruled more quickly than anticipated and blocked the rule, stating that the FTC does not have authority to make such a broad rule. A spokesperson for the FTC indicated that they will consider an appeal, but for now the implementation has been blocked and employers are allowed to continue to use and enforce non-compete agreements. The FTC retains authority to bring enforcement action on a case-by-case basis challenging non-compete agreements as a violation of federal competition law.*
While the dust hasn’t settled in the case of non-compete agreements, employers should prepare for the ban to go into effect on September 4, 2024, 120 days after the FTC issued a final ruling.
In April of this year, the FTC banned non-compete clauses for most employees. Despite this, the ruling has already faced two challenges, each with different outcomes. In July, a Pennsylvania court denied an employer’s request to temporarily bar the ruling. However, in the same month, a Texas court issued a preliminary injunction temporarily blocking the enforcement of the ruling. Notably, no nationwide injunction blocking the enforcement of the rule has been issued.
That said, the court in the Texas case has indicated that it will issue its final merits determination by Aug. 30, 2024. Thus, it is possible that the rule may still be struck down and its enforcement blocked nationwide prior to its Sept. 4 effective date.
Non-competes typically impose contractual conditions that prevent workers from taking a new job or starting a new business. The FTC views non-competes as an unfair method of competition, and therefore a violation of Section 5 of the FTC Act.
Under the FTC’s new rule, existing non-competes for senior executives can remain in force under the FTC’s final rule, but new non-competes for any employees, including senior executives, will be banned and deemed unenforceable. Senior executives are defined as employees earning more than $151,164 annually and who are in policy-making positions.
Employers will be required to provide notice to employees other than senior executives who are bound by existing non-competes that they will no longer be enforcing them. The FTC has included model language in the final rule that employers can use to communicate with employees. The sample language can be viewed here: https://www.ftc.gov/legal-library/browse/rules/noncompete-rule
Employers have alternative means of protecting their investments. NDAs and trade secret laws are in place to safeguard proprietary and other sensitive information.
What to do?
- Review existing non-competes and determine if any will still be enforceable after the final rule becomes effective (for senior executives).
- Notify employees previously bound by non-competes that they will no longer be enforced.
- Review and/or update non-disclosure and confidentiality agreements to ensure the protection of trade secrets and sensitive proprietary information.