The FTC Noncompete Rule: Where Are We Now?

As you know, several months ago the FTC issued a rule that – effective September 4, 2024 – certain existing and all future noncompetition covenants will no longer be enforceable. More specifically, after September 4, noncompetition covenants will be unenforceable unless the employee: (i) signed the noncompetition covenant on or before September 3, 2024; (ii) earns more than $151,164 annually; and (iii) is in a “policy-making position” (the so-called “Executive Exception”). In addition, the Rule requires employees to notify all current and former employees with existing noncompetition covenants that such covenants will no longer be enforceable. (To be clear, the Rule only affects noncompetition covenants. It does not affect customer or employee non-solicit covenants, confidentiality covenants, etc.

The Rule is being challenged in at least three Federal courts around the country. A court in Texas issued a preliminary injunction on the basis that the FTC likely did not have the authority to issue the Rule. While the injunction currently applies only to the parties in that case, the Judge has stated that she will issue an order by August 30 on the plaintiff’s request to expand the injunction to the State of Texas or even the entire country. Meanwhile, a Pennsylvania court reached the opposition conclusion, denying an injunction and holding that it is more than likely that the FTC does have the proper authority to promulgate the Rule. A decision from a Florida Court is pending.

Whatever the outcome, the issue will most surely be appealed, perhaps to the Supreme Court. Most predict that, given SCOTUS’ hostility to the “administrative state” and its recent Loper ruling, the Rule ultimately will be invalidated. A Republican administration, moreover, would likely rescind the Rule entirely.

Unfortunately, unless the Texas Court issues a nationwide stay on August 30, employers are faced with uncertainty: ignore the Rule and risk an enforcement action or prematurely rescind existing noncompetition covenants. Given the uncertainty and the fact that the FTC has little enforcement power, coupled with the risk of unnecessarily rescinding existing covenants and not being able to “get them back,” we continue to recommend a “wait and see” approach.

In the meantime, employers are well advised to at least prepare for implementation of the Rule, including:

The FTC Noncompete Rule: Where Are We Now?

As you know, several months ago the FTC issued a rule that – effective September 4, 2024 – certain existing and all future noncompetition covenants will no longer be enforceable. More specifically, after September 4, noncompetition covenants will be unenforceable unless the employee: (i) signed the noncompetition covenant on or before September 3, 2024; (ii) earns more than $151,164 annually; and (iii) is in a “policy-making position” (the so-called “Executive Exception”). In addition, the Rule requires employees to notify all current and former employees with existing noncompetition covenants that such covenants will no longer be enforceable. (To be clear, the Rule only affects noncompetition covenants. It does not affect customer or employee non-solicit covenants, confidentiality covenants, etc.

The Rule is being challenged in at least three Federal courts around the country. A court in Texas issued a preliminary injunction on the basis that the FTC likely did not have the authority to issue the Rule. While the injunction currently applies only to the parties in that case, the Judge has stated that she will issue an order by August 30 on the plaintiff’s request to expand the injunction to the State of Texas or even the entire country. Meanwhile, a Pennsylvania court reached the opposition conclusion, denying an injunction and holding that it is more than likely that the FTC does have the proper authority to promulgate the Rule. A decision from a Florida Court is pending.

Whatever the outcome, the issue will most surely be appealed, perhaps to the Supreme Court. Most predict that, given SCOTUS’ hostility to the “administrative state” and its recent Loper ruling, the Rule ultimately will be invalidated. A Republican administration, moreover, would likely rescind the Rule entirely.

Unfortunately, unless the Texas Court issues a nationwide stay on August 30, employers are faced with uncertainty: ignore the Rule and risk an enforcement action or prematurely rescind existing noncompetition covenants. Given the uncertainty and the fact that the FTC has little enforcement power, coupled with the risk of unnecessarily rescinding existing covenants and not being able to “get them back,” we continue to recommend a “wait and see” approach.

In the meantime, employers are well advised to at least prepare for implementation of the Rule, including:

• identifying current and former employees who may satisfy the “Executive Exception”

• identifying the universe of, and obtaining contact information for, current and former employees with active noncompetition covenants
• preparing the required notices (we recommend using the FTC Model Form, a copy of which accompanies this Client Alert)

• updating templates and onboarding processes

Note that even if the FTC Rule ultimately becomes void, other laws continue to impact the use of noncompetition covenants. California and Minnesota continue to completely prohibit them. (Other states, most notably New York, are actively considering similar bans.) Many states permit them only if the employee earns a certain amount of income or if the employer follows several procedural safeguards. The National Labor Relations Board, moreover, recently held that an employer’s noncompetition covenant violated the National Labor Relations Act with respect to non-supervisory employees.