FTC’s Noncompete Ban Blocked, For Now

FTC’S NONCOMPETE BAN BLOCKED, FOR NOW

By Josh Brittingham and Jayde Logan

September 3, 2024

FAQ

• What is a noncompete?

The Federal Trade Commission (“FTC”) defines a noncompete as any term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting employment with another business or operating a business.

• What is the status of the FTC noncompete ban?

On August 20, 2024, a federal Judge temporarily halted implementation of the noncompete ban nationwide. Specifically, U.S. District Judge Ada Brown in Dallas ruled to bar the FTC’s ban, which generally would have banned agreements that prevent workers from joining their employers’ rivals or starting competing businesses. The rule was scheduled to take effect on September 4.

• What would be the effect of the noncompete ban if implemented?

The rule bans “noncompete” provisions, which are defined as either oral or written contracts that prevent a worker from (i) seeking or accepting work within the United States with a different employer after the employment concludes; or (ii) operating a business in the United States after the conclusion of employment. See our prior FAQ on page 2.

• What was the basis of Judge Brown’s August 20, 2024 ruling?

In her ruling, Judge Ada Brown of the U.S. District Court for the Northern District of Texas wrote that the federal agency had overstepped its power when it approved the ban. Judge Brown stated that the FTC does not have the authority to adopt broad rules banning practices it deems unfair methods of competition. She also criticized the FTC for not providing sufficient evidence to justify banning nearly all noncompete agreements, describing the rule as “arbitrary and capricious.” “The FTC lacks substantive rulemaking authority with respect to unfair methods of competition,” she wrote. “The role of an administrative agency is to do as told by Congress, not to do what the agency think[s] it should do.”

• Who brought the challenge against the FTC’s rule?

The challenge was led by the U.S. Chamber of Commerce, the country’s largest business lobby, and Ryan LLC, a tax services firm in Dallas, who sued to block the rule just hours after the Federal Trade Commission voted narrowly to ban noncompetes for almost all U.S. workers back in April 2024.

• Have other courts ruled on the noncompete ban?

Yes. Other courts have issued conflicting rulings. For example, in August 2024, a federal judge in Florida ruled that the ban was likely invalid and blocked its application to a real estate developer. But a judge in Philadelphia previously ruled in favor of the FTC’s position, stating that noncompetes are virtually never justified.

• Is it possible that the noncompete ban will be reinstated?

Yes, the nationwide block of the noncompete ban could be overturned on appeal. The issue could ultimately be decided by the U.S. Supreme Court.

• What should I do?

Contact your attorney at Carney Badley Spellman, P.S. to stay abreast of the status of the rule and to develop a particularized risk assessment and strategy for your company.

Previous FAQ

June 10, 2024

• What is the Federal Trade Commission (“FTC”) noncompete ban?

The rule bans “noncompete” provisions, which are defined as either oral or written contracts that prevent a worker from (i) seeking or accepting work within the United States with a different employer after the employment concludes; or (ii) operating a business in the United States after the conclusion of employment.

• Who does the rule apply to?

The rule applies to all workers in the United States (including employees and independent contractors).

• When does the rule become effective?

It is unclear. Absent a legal challenge, the rule is set to go into effect on September 4, 2024. HOWEVER, multiple lawsuits have been filed against the FTC to block implementation of the ban, so it is unclear if or when it may take effect.

• Does the ban affect non-solicitation or non-disclosure agreements?

Probably not. Trade secret protections also remain intact under the FTC’s final rule. It also generally does not affect non-solicitation or non-disclosure agreements. However, such provisions could be invalid if they are so broad that “they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.” Whether or not a non-solicitation or non-disclosure clause meets this threshold is a “fact-specific inquiry.”

• Are there any exceptions to the ban?

Yes. The rule does not invalidate existing noncompetes with senior executives. But going forward, beginning on the date the rule takes effect (if it does), employers are not permitted to enter into noncompetes with any workers, including senior executives—even if they are given in exchange for compensation, equity, or other consideration.

• What is a senior executive under the rule?

“Senior executives” are defined as workers who, when employed, were in a policy-making position and received total annual compensation of at least $151,164 in the year preceding departure. Note that while existing noncompetes with senior executives remain in force, such agreements cannot be signed after the effective date of the rule.

• Does the rule impose notification requirements?

Yes. The new rule also includes a notification component, such that employers will be required to notify current and former employees who are subject to noncompetes that their noncompete agreements are now invalid. This notification must be made no later than the effective date of the rule. The FTC provided model notification language. If an employer provided consideration (including compensation or equity) in exchange for the noncompete, the employer may not claw back or force forfeiture of that consideration as a result of the invalidation of the noncompete. In other words, workers are entitled to keep the consideration and to benefit from the invalidation of their noncompetes.

• Is there a bona fide sale of business exception?

Yes. The rule provides an exception for a bona fide sale of business, in that it expressly excludes “a noncompete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” This exception cannot be used to require executives or key employees who are not sellers to sign noncompete agreements in connection with a sale. In a win for business interests, the proposed rule’s requirement that the seller be an owner of 25 percent of the entity being sold was eliminated in the final rule.

• Is any immediate action required?

Because of the imminent legal challenges and the potential for an injunction that would delay the effective date of the new rule, employers do not need to take immediate action on existing noncompete agreements. However, employers should audit existing agreements so that they understand what agreements exist and can prepare to send out notices when and if it becomes necessary to do so. In addition, between now and the effective date, employers should carefully consider whether to include noncompetition provisions in new employment-related agreements, or whether other forms of robust restrictive covenants are sufficient to protect the employer’s interests. We will keep you updated as legal challenges progress.

• What should I do?

Contact your attorney at Carney Badley Spellman, P.S. to stay abreast of the status of the rule and to develop a particularized risk assessment and strategy for your company.