This article, written by Jason Gregoire, was originally posted by seacostonline.com and can be found here.
On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final rule (“Rule”), which bans employers from imposing post-employment non-competes on their workers. The Rule is set to take effect on Sept. 4, 2024, but there are several lawsuits pending that seek to stop the FTC from ever enforcing the rule. This article covers the basics of the Rule, how to comply, and the current state of litigation efforts to kill the Rule.
What is the Rule and To Whom Does it Apply? The Rule seeks to ban post-employment non-competes between employers and their workers. The Rule defines “non-compete” as any contract term, workplace policy, or term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking work, accepting work, or operating a business after the conclusion of employment. The Rule broadly defines “workers” to include employees, independent contractors, externs, interns, volunteers, and apprentices. The Rule prevents employers from entering into new non-competes and voids existing non-competes unless an exception applies.
In terms of exceptions, the Rule does not apply to non-disclosure, non-solicitation of employee, and non-solicitation of customer covenants and excludes employers who are exempt from FTC jurisdiction such as certain banks, nonprofits, and common carriers. In addition, the Rule does not ban non-competes used in connection with the sale of a business or in certain senior executive contracts.
The Rule supersedes conflicting state laws (i.e., state laws that provide less protection than the Rule), but does not prevent states from enacting or enforcing stricter laws. For example, New Hampshire law prohibits non-competes for physicians, nurses, low-wage workers and more, and requires employers to show prospective employees copies of proposed non-competes before offers of employment are accepted. These laws are not impacted.
How to Prepare and Failure to Comply. If you are an employer who currently utilizes non-competes with your employees, there are two primary preparations you should take.
First, the Rule requires employers to provide written notice to affected employees on or before September 4, 2024, delivered by hand, mail, email or text, which states that their existing non-competes cannot and will not be enforced. The Rule provides a sample notice form. Employers should evaluate the time necessary to prepare and deliver the required notices and whether it is feasible to wait for the outcome of the legal challenges described in Section 3 below.
Second, employers should adopt other measures to protect their goodwill, trade secrets, and confidential information such as non-disclosure agreements, confidentiality policies, and other restrictive covenants. Employers should also consider using employee retention tools such as increased compensation, bonuses, vesting equity awards, and deferred compensation tied to continue employment.
If the Rule survives legal challenge, employers will need to update their existing forms, contracts, and policies to remove any offending non-competes. Failure to comply with the Rule may result in fines, penalties, and/or injunctive relief under the FTC Act.
Will a Court Strike Down the Rule? Almost immediately after the FTC issued the Rule, several lawsuits were filed seeking to stop the FTC from being able to enforce the Rule.
The first case, Ryan, LLC v. FTC, was filed in the U.S. District Court for the Eastern District of Texas on the day the FTC voted to approve the Rule. On July 3, 2024, the Ryan Court issued an injunction preventing the FTC from enforcing the Rule but only as to the handful of plaintiffs that filed suit on the grounds that, among other things, the FTC lacks statutory authority to define “unfair methods of competition” and acted in an arbitrary and capricious manner. The Ryan Court subsequently allowed the U.S. Chamber of Commerce to intervene and present arguments as to why the Court should issue a nationwide injunction to prevent the FTC from enforcing the Rule against anyone. The Ryan Court has indicated that it will issue a ruling on the nationwide injunction request by August 30, 2024.
Similar lawsuits are also pending in federal district courts in Pennsylvania and Florida which seek the same relief. Although it is expected that the issue will first be decided in Ryan, it is possible another court will rule on the nationwide injunction issue sooner.
While analysts expect that a nationwide injunction will be issued before September 4th, this outcome is not certain and employers should still prepare in case the Rule survives legal challenge including, but not limited to, conferring with company legal counsel. A wait and see approach may not be feasible for larger employers given the above-referenced notice requirement and the need to analyze the impact of the Rule given state law overlay.