On April 23, 2024, the FTC, by a 3 -2 party line vote, passed a new rule, banning nearly all noncompetition agreements in the United States, in all businesses subject to FTC jurisdiction (the “Rule”). We commented on the Rule in our May 16, 2024 Client Alert, and noted the likelihood of serious legal challenges, including ones based on the FTC’s rulemaking authority, FTC overreach and other issues.

On July 3, 2024, a Texas Federal District Court issued a preliminary injunction against the Rule, finding that the FTC did not have the authority to adopt substantive rules to enforce the unfair competition prohibitions articulated in Section 6(g) of the FTC Act. See Ryan, et al. v. Federal Trade Commission, No. 24-cv-00986 (N.D. Tex. July 3, 2024). The Court also found the adoption of the Rule to be arbitrary and capricious, based on its lack of consideration of alternatives, and that the Rule is unnecessarily overbroad to address the alleged harm it claimed as its rationale. There are additional legal arguments against the Rule which the Court may address in its final ruling, and there are court challenges to the Rule brought by other parties and pending in other courts.

While the District Court in Ryan issued an injunction against the Rule taking effect, that injunction applies only to the plaintiffs in that case¹. All other employers, parties and persons are still subject to the Rule.

The FTC Rule will go into effect for everyone else on September 4, 2024. Under the express terms of the Rule (Section 910.2 (b)), by the effective date of September 4, employers “…must provide clear and conspicuous notice” to each covered employee, that the employee’s “…non-compete clause will not be, and cannot legally be, enforced against” the employee. This means that, under the terms of the Rule, by the effective date, employers need to identify all employees subject to the Rule (which likely will be nearly all employees who have noncompetes), and to provide individual notices that the employee’s noncompete cannot legally be enforced.

In addition to the burden and expense of taking these steps, providing these notices cannot help but create tremendous confusion over the legal status of existing noncompetes – and potentially jeopardize their enforcement — were a court (the initial district court or another) to subsequently strike the Rule in its entirety, an outcome that seems quite possible, even likely. In such a situation, employees who might not otherwise question their noncompetes might be encouraged to ignore the restraints and challenge the agreements, in response to their own employer giving notice that the agreements cannot be legally enforced.

One solution could be to file “tag along” judicial challenges to existing cases filed by others, and to seek equal treatment under the terms of any preliminary injunctive order granted to others. It may be that a court will strike the Rule as to all persons subject to noncompetes, pending full judicial review, but no one can predict whether that will occur. At a minimum, employers may want to review their employment data to determine how extensive their exposure is to the Rule, the costs of identifying employees and providing notice, the consequences of noncompliance, the potential impact of adverse rulings, and the impact where employees have been notified, in compliance with the Rule, that their noncompetes are no longer valid.

Footnote

1 Plaintiff Ryan, and Plaintiff-Intervenors the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce.