Employers Shouldn’t Rush to Comply With FTC’s Noncompete Rule

Adam Israel, partner in the firm’s Birmingham office and member of the Litigation Practice, and Tripp DeMoss, attorney in the firm’s Montgomery office and member of the Litigation Practice, co-authored the following article for Bloomberg Insights, published on April 25,2024 titled, “Employers Shouldn’t Rush to Comply With FTC’s Noncompete Ban."

The Federal Trade Commission’s final rule banning most non-competition agreements is anything but final. It’s just the beginning of what likely will be a lengthy court battle over the rule’s validity, leaving its future uncertain.

FTC commissioners narrowly approved the ban April 23 after receiving more than 26,000 public comments over the past year. If nothing changes, the rule will take effect 120 days from its publication in the Federal Register, meaning employers would have four months to comply with the rule’s mandates. But there will be significant legal challenges right out of the gate. 

The two commissioners who voted no foreshadowed the likely grounds for those challenges, voicing concerns that the FTC lacked the constitutional and statutory authority to adopt the proposed rule nullifying existing contracts and outlawing a category of contracts that were legal when the Federal Trade Commission Act was passed in 1914. 

Shortly after the vote, Ryan LLC, a tax services firm, filed a lawsuit in Texas federal court seeking to invalidate the rule. Business groups led by the US Chamber of Commerce also sued to block the proposed final rule from taking effect. 

There undoubtedly will be other legal challenges to implementation of the rule, but they won’t automatically stop the rule from taking effect. Rather, the 120-day compliance clock will keep ticking unless and until a court issues an injunction staying the rule’s effectiveness pending judicial review. Such an injunction is virtually certain, and it’s unlikely that the proposed final rule will go into effect anytime soon, if ever.

Requirements and Exceptions

The new rule requires businesses to stop entering into noncompetes with workers—defined to include paid or unpaid employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors. It also requires businesses to refrain from enforcing existing noncompetes with workers, except senior executives, and to provide notice to workers, except senior executives, that their noncompetes will not, and cannot legally, be enforced. 

A senior executive is a worker who was in a policy-making position for the business and was paid at least $151,164 over the preceding year or would have been paid that amount when annualized had the worker been employed during the whole year, under the rule. It includes a proposed form of the required notice to workers and provides a safe harbor for businesses that use that notice.

The rule doesn’t apply to non-competes executed in connection with a bona fide sale of a business entity. It also doesn’t apply to entities over which the FTC lacks jurisdiction, such as non-profit entities, certain banks and savings and loan institutions, federal credit unions, certain common carriers, certain domestic and foreign air carriers, and businesses subject to the Packers and Stockyards Act of 1921, except as provided by 7 U.S.C. § 227(b). 

It further doesn’t apply to other types of restrictive covenants like non-solicitation agreements, no hire agreements, and confidentiality agreements, unless the function of those agreements is to prevent a worker from seeking or accepting work or operating a business in the US following the conclusion of the work engagement to which the agreement applies. 

The rule expressly carves out existing noncompete disputes from its applicability. So, for example, if an employer has already filed suit over an alleged breach of an existing noncompete, the rule would have no effect on that action.

Next Steps

The next 30 to 60 days will be important when determining response to the rule. Employers should keep a close eye on the various legal challenges as they work their way through the judicial system. If no court acts to temporarily suspend the rule, employers will need to prepare to provide employees the required notice of unenforceability and take steps to amend their employment agreements to remove noncompetes for new hires. 

However, if one or more federal courts enjoin the rule’s application pending judicial review, as expected, no action will be required in the short term, and any change in business practices would be premature. Employers should work with their lawyers to monitor the status of ongoing legal challenges and fully understand the scope of any temporary stay that may, or may not, be issued.

While the FTC’s noncompete rule represents a major change to fair competition law that could have major effects on businesses small and large, it seems unlikely that this rule will have any immediate impact in the short term. So, businesses should be reticent to take immediate steps to begin complying with the rule’s requirements. Instead, they would be wise to monitor the ongoing legal challenges to know when and if compliance will be required.

Reproduced with permission. Published April 25, 2024. Copyright 2024 Bloomberg Industry Group 800-372-1033. For further use please visit: https://www.bloombergindustry.com/copyright-and-usage-guidelines-copyright/