Update on the Federal Trade Commission (FTC)’s Non-Compete Rule

In April, we alerted you that the Federal Trade Commission (FTC) issued a new rule which essentially bans non-compete limitations for workers in the United States.  The rule banning non-competes is scheduled to go into effect on September 4, 2024.

Although practitioners have been anticipating a nationwide preliminary injunction to derail the ban, federal courts to date have only temporarily enjoined the FTC from enforcing the rule against Ryan LLC, a global tax services and software provider. The judge in Ryan LLC v Federal Trade Commission has refused to extend the scope of the preliminary injunction beyond applicability to Ryan.  The judge in Ryan LLC has indicated she will release her final ruling by August 30th, which is mere days from the rule's scheduled effective date.

As September draws near, senior management and human resources teams should consider:

1. Working with counsel to review the terms of outstanding non-competes;
2. Assess how best to utilize the ability to grandfather preexisting non-competes with senior executives;
3. Develop a strategy for distributing notices to current and former employees stating their non-competes may no longer be enforceable; and
4. Identify other avenues to mitigate the potential damage competing employees could cause the company.

Employers should consider carefully reviewing the non-compete provisions their current and former employees are party to and classifying the employees based on whether they are able to qualify as senior executives for purposes of grandfathering certain non-competes. To be enforceable, any new non-competes will require additional new consideration in exchange for the executives' entry and continued compliance.  The FTC’s rule also includes model language for notifying current and former employees that their non-competes are no longer enforceable (when applicable). Employers should be developing notices that align with their business goals and making plans to efficiently deliver compliant notices to affected employees.

Notwithstanding the practical considerations for developing a plan of action for compliance, employers can still reasonably anticipate a protracted uphill legal battle for the FTC to successfully implement this rule in its entirety. There are a number of other challenges in other jurisdictions and a court could still issue a broader nationwide injunction or vacate the rule in its entirety prior to the scheduled effective date. We will continue to keep you apprised of the legal proceedings on this topic.