The Future of the FTC’s Non-Compete Ban Remains Uncertain—Consider Making Initial Preparations for Compliance

By Isaac Linnartz, Zeb Anderson and Dani Dobosz

As we explained in a previous client alert, the Federal Trade Commission ("FTC") has published a proposed final rule that would ban nearly all worker non-competes. The rule was published on May 7, 2024, and will go into effect on September 4, 2024, unless a court enjoins or invalidates it before then.

The FTC’s announcement of the non-compete rule prompted several legal challenges, and employers have been monitoring that litigation to see whether it will delay the effective date of the rule or invalidate it entirely. While the litigation is moving forward, and while one court has concluded that the rule is likely to be struck down, no court has issued a broadly applicable ruling invalidating or delaying the rule nationwide.

On July 3, 2024, a federal judge in the Northern District of Texas issued a preliminary injunction prohibiting the FTC from implementing or enforcing its non-compete ban against the parties to that litigation, which include Ryan, LLC, the U.S. Chamber of Commerce, Business Roundtable, the Texas Association of Business, and the Longview Chapter of Commerce. The court concluded these parties were likely to prevail on arguments that the FTC lacked statutory authority to promulgate the non-compete rule and that the non-compete rule is arbitrary and capricious in violation of the Administrative Procedures Act. The judge said she plans to make a final decision on whether the rule is invalid by August 30, 2024. Notably, the court limited the injunction to the named parties only, rather than issuing a nationwide injunction, which means that only those parties get the benefit of the ruling. The court also declined to extend the injunction to members of the parties, such as members of the U.S. Chamber. In short, the opinion strongly suggests that the judge will invalidate the FTC’s non-compete rule between now and August 30th, but it leaves unclear whether that determination would apply only to the parties, to the parties and their members, or to employers nationwide.

Similar litigation is pending in federal court in the Eastern District of Pennsylvania. That court held a hearing on July 10, 2024 on whether to stay and enjoin the non-compete rule and has said it will issue a decision by July 23rd. If the court grants a preliminary injunction, the key question will be whether it is limited to the plaintiff, ATS Tree Services, LLC, or nationwide in scope. A third challenge is pending in federal court in the Middle District of Florida but is not as far along in the litigation process.

In short, while the first court ruling went against the FTC, and while the ultimate viability of the FTC’s non-compete rule remains under serious question, it is too early to say whether the rule will be enjoined or invalidated. It is even more uncertain whether the rule will be delayed or invalidated prior to the September 4th effective date. Given that, there are several steps employers should consider taking:

Steps to Consider Based on FTC Non-Compete Rule

• Take inventory of all non-competes your company has in place, including active non-competes with former employees. Note that the definition of non-compete is broad enough to cover any contract, provision, or policy that has the effect of preventing a worker from, or penalizing a worker for, obtaining other work after leaving your company. This includes liquidated damages, cost share, severance, certain training re-payment agreements, and forfeiture-for-competition provisions that penalize an employee for engaging in post-employment competition, whether by imposing a cost (e.g., liquidated damages) or rescinding a benefit (e.g., forfeiture for competition).

• Ensure that you have current or last-known contact information for any current or former workers who have an active non-compete. This information will be necessary for sending out the written notice the rule requires, which is supposed to be done by the effective date of the rule. The required notice may be delivered by hand, mailed to a personal street address, emailed, or even sent by text message.

• Consider whether to join the U.S. Chamber of Commerce, whose members may be covered by the final decision in the first case described above even if it does not apply nationwide. Information about Chamber membership is available here.

• Establish a timeline and process for preparing and sending the required notice if that becomes necessary. The rule requires providing "clear and conspicuous notice to the worker by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker." The FTC has provided model language in the regulation and on its website. Employers may want to consult with counsel about whether and to what extent to use the model language and when to send the notice, particularly given the uncertainty about whether the rule will survive judicial review.

Evergreen Steps

• Ensure that you have confidentiality agreements with each employee or contractor who has access to confidential information or trade secrets.

• Ensure that your non-compete, non-solicit, and confidentiality agreements and provisions are narrowly tailored and comply with applicable state law, which varies substantially from state to state.

• Take other measures to protect confidential information and trade secrets, including limiting physical and electronic access based on need-to-know, having confidentiality and security policies, and using on-boarding and off-boarding processes to train and remind workers about confidentiality and return-of-property obligations.

We are continuing to monitor the legal challenges to the FTC’s non-compete rule and will provide further updates if the rule is delayed, enjoined, or invalidated.

If you have questions related to this alert, please contact Zeb Anderson, Isaac Linnartz, or another lawyer within the firm’s Non-Compete and Trade Secrets or Workplace Law practice areas.