Employer Alert: The FTC’s New ‘Non-Compete Rule’

The Federal Trade Commission recently announced a nationwide ban on Non-Compete Agreements, set to take effect on September 4, 2024. The enforceability of the FTC’s ban has been challenged in Texas and Pennsylvania federal court. The results of those two cases are still pending, but some initial rulings by those two courts have left business owners scratching their collective heads.

However, afederal judge in Texas on August 21, barred a U.S. Federal Trade Commission rule from taking effect that would ban agreements commonly signed by workers not to join their employers’ rivals or launch competing businesses.

The Texas court held that the FTC overstepped its authority, but it stopped short of issuing a nationwide injunction that would have prevented the ban from going into effect. In contrast, the Pennsylvania court held that the FTC ban was valid and enforceable.

Below is a more in-depth summary of the two court’s preliminary rulings:

The Texas Court’s Ruling

On July 3, 2024, the Texas federal judge held that the FTC likely exceeded its authority when it issued its rule largely prohibiting employment-based noncompete agreements (the “Non-Compete Rule”). The court issued an order to temporarily suspend the effective date of the FTC from enforcing the Non-Compete Rule — but only as it relates to the parties to the case. This means that, unless there is another order issued in the meantime, the FTC’s ban on non-compete agreements remains valid and enforceable for all companies and employees across the U.S.

The court’s decision (and accompanying analysis) strongly suggest that the court will strike down the rule on the merits. The court committed to issuing a final decision on the merits by August 30, 2024. In the interim, the parties will further brief the merits issues, including whether the injunction should be extended on a nationwide basis. .

The Pennsylvania Court’s Ruling

The Pennsylvania court reached a near-opposite conclusion. It held that the FTC’s ban on non-compete agreements was within its broad statutory authority to prevent unfair methods of competition. The court accepted the FTC’s argument that noncompete agreements are not justified by legitimate business purposes and are exploitative and coercive when entered into with employees who are not senior executives.

What now?

Because the Texas court declined to implement a nationwide preliminary injunction — and may not do so until three business days before the Non-Compete Rule takes effect, if at all — and because the Pennsylvania court intends to uphold the ban, employers should continue to plan for implementation of the rule on September 4, 2024.

A few things employers can do to prepare for the Non-Compete Rule include:

• Identify and review all agreements a business has with former and current employees that impose post-employment restrictive covenants, including non-competition agreements that would be banned under the FTC rule as well as other agreements (confidentiality, non-disclosure agreements and non-solicitation agreements) that may not be subject to the ban. Employers should consult legal counsel if they are uncertain whether these agreements fall within the scope of the ban.
• Consider improvements and clarifications to strengthen non-solicitation, confidentiality agreements and non-disclosure agreements regardless of the noncompete ban’s future. Clear, precise and narrowly tailored drafting is essential. Employers with workers in multiple states must account for the many different and evolving state laws in their agreements.
• Prepare to provide the required notice to workers under the final rule. It will likely take time to identify the workers who are subject to non-competes or equivalent employee policies, compile the relevant worker address information, and draft and send the notices. If the rule becomes effective on September 4, 2024, the notification must be made by the effective date. Employers who fail to comply with the new rule could face significant legal and financial repercussions.

Gallagher & Kennedy, P.A. will continue to monitor and report on the developments and progress concerning the rulemaking, the lawsuits challenging the ban, and its potential impact on employers and their operations.

Haley Harrigan is a shareholder at Gallagher & Kennedy and chair of the firm’s Employment and Labor Law Department. She regularly advises employers regarding the complicated patchwork of both state and federal employment laws, including wage and hour laws, restrictive covenants, Title VII claims and workplace issues. She frequently drafts employment agreements, policies, handbooks and separation agreements, and counsels employers on best practices and how to avoid legal pitfalls in the workplace.