Earlier this year, the U.S. Federal Trade Commission (FTC) voted 3-2 to ban most provisions in agreements with an employer preventing or limiting future competition by U.S. workers (non-competes), with limited carve-outs and exceptions (the rule).
While the rule was scheduled to come into effect on September 4, 2024, on August 20, 2024 a federal judge in Texas stayed the ban by issuing a nationwide injunction. The court found that the FTC exceeded its statutory authority by banning practices it deems unfair methods of competition through the adoption of arbitrary and capricious rules. The decision stated that the FTC had not justified banning virtually all non-competes, suggesting that the FTC should have targeted specific, harmful non-competes.
In response to the ruling, the FTC has stated that it is “considering an appeal” and that the decision “does not prevent the FTC from addressing [non-competes] through case-by-case enforcement actions.”
Other Litigation
Litigation regarding the rule has been moving through the federal court system in other states, including Pennsylvania, where a federal judge declined to issue an injunction. Despite that ruling, the plaintiff in that case recently argued that because a decision on appeal affirming the Texas district court’s nationwide injunction would resolve the Pennsylvania case, the Pennsylvania district court should stay the Pennsylvania case pending resolution of the Texas appeal, if any. The FTC argued that the Pennsylvania court should reject the plaintiff’s request on a number of grounds and that the judge should render its own considered decision.
In a separate case in Florida, a federal judge entered a preliminary injunction that prohibited the FTC from enforcing the rule, but only as to the challenging plaintiff in the case. The FTC has indicated that it is considering whether to appeal that decision as well.
Potential Impact of the Rule on Employers
The FTC rule, if it comes into effect, would represent a comprehensive ban on new non-competes with all workers, including senior executives. Existing non-competes with senior executives would likely remain in force, although even this is not entirely free from doubt. The ban may also cover certain other employer-protection provisions entered into as part of employment or severance arrangements or as part of M&A transactions if they are so restrictive that they effectively prevent a worker from getting a new job or starting a business. These provisions include broad confidentiality agreements, certain non-solicitation agreements, and possibly garden-leave arrangements.
In general, the FTC rule would prohibit employers from entering into, enforcing, or attempting to enforce non-compete agreements with workers, including employees, independent contractors, and others. Existing non-compete agreements with “Senior Executives” may still be enforced, but new non-compete agreements could not be entered into after the effective date of the rule. Who qualifies as a “Senior Executive” depends on both salary and decision-making authority.
All other existing non-competes would be unenforceable after the effective date. As currently drafted, the rule would require that, by the effective date, covered employers provide notice to workers who are party to non-competes prohibited under the rule that such non-competes cannot be enforced. Employers would need to specifically rescind existing non-compete clauses and notify affected employees in writing.
Effect of Injunction
The Supreme Court may ultimately hear one or more of the pending cases and issue a decision that clears up the current uncertainty about the rule’s enforceability and scope. Until then, however, employers need not take any action, but should be aware of the rule and that, if it does come into effect, it will supersede state law to the extent the state allows conduct that is deemed a method of unfair competition under the rule.
Please feel free to reach out to us with any questions regarding this important evolving issue.
For further assistance please contact your primary Golenbock attorney or the attorneys listed below:
Preston Ricardo, Partner and Co-Chair, Litigation Department
Chair, Non-Compete & Trade Secrets Practice
(212) 907-7341
Email: pricardo@golenbock.com
Arianna Caldwell, Associate
(212) 907-7300
Email: acaldwell@golenbock.com
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