So Much for Goodbye: FTC Ban on Noncompetes Just Overturned

On May 7, 2024, the Federal Trade Commission (FTC) published a much-anticipated new rule that would have prohibited ALL new noncompetes with employees nationwide, and enforcement of almost all existing noncompetes beginning September 4, 2024. However, just yesterday, a federal district court in Texas held that the FTC lacked the authority to issue the rule and issued a nationwide injunction that now prevents the rule from going into effect. The agency has initially indicated it is weighing its options and may yet appeal the decision.

Summary of the FTC Rule

Under the FTC rule, noncompetes are broadly defined to include any contractual commitments (often called “restrictive covenants”) that “prohibit a worker from, penalizes a worker for, or functions to prevent a worker from” either seeking or accepting work from a competitor after leaving employment or operating a competing business after leaving employment. The rule also mandates that notification be given to employees and former employees with an existing noncompete that is now unenforceable.

The FTC rule includes only a very limited exception for certain “senior executives” with a noncompete executed before the rule becomes effective, but only if both of the following criteria are satisfied:

1. They were paid the necessary minimum compensation. Initially, the minimum compensation would be $151,164 in total annual compensation, subject to future increases for inflation. The term “annual compensation,” for purposes of determining if the exception has been satisfied and the noncompete’s enforcement is permissible, is based upon total compensation paid to the employee in the preceding year, unless the employee was not employed for that full year, in which case it is annualized based upon the amount earned in that preceding year. If the employee was not employed at all in the preceding calendar year, then it is based upon the annualized amount from the year prior to the year in which the employee’s employment ended.
2. They were in a policy-making position. “Policy-making position” means “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.” The rule makes clear that this exception would not apply to a person with such authority over a subsidiary or affiliate of a common enterprise unless that person’s authority applies to the common enterprise as a whole.

The FTC rule specifically carves out noncompetes entered into in conjunction with the bona fide sale of a business or ownership interest in a business. It also does NOT address, prohibit, or affect the enforceability of nondisclosure agreements, nonsolicitation agreements, or similar covenants with an employee, provided that the terms of those limitations are not written so broadly as to effectively “function” as a noncompete.

In addition to effectively voiding most existing noncompetes, the FTC rule would have required that employers with any existing noncompetes provide the affected worker (that is, any current employees subject to a noncompete or any previous employees with a noncompete that is still otherwise in effect) with “clear and conspicuous notice to the worker” that it is not enforceable. A model notice was also published and can be found online here.

Key Takeaways for Employers

1. Stay tuned. For now, at least, employers, are under no obligation to send any notices to affected employees/former employees with a current noncompete. Those that have done so already, may want to consult counsel about their options. Likewise, given that the rule has been struck down, employers are not prevented from pursuing enforcement of any current noncompetes, if needed, provided the terms are otherwise enforceable within their jurisdiction.
2. As we noted previously, employers should consider using other types of agreements to protect their legitimate interests. Noncompetes are just one type of restrictive covenant that may be entered into with employees. Other types of agreements may offer some or all of the protections that an employer sought by using a noncompete, provided it is structured correctly. For example, nonsolicitation clauses can prevent departing employees from taking customers and other employees with them. Nondisclosure agreements can prevent employees from using or disclosing their employer’s trade secrets or other confidential information to, or on behalf of, third parties, including customer and contact information. Invention assignment agreements can ensure that employers own the rights to intellectual property the employees create and keep it away from competitors. These alternative agreements, or clauses, remain a viable option for most companies, if done correctly. Remember though, that any of these restrictions must also comply with applicable state law.
3. Employers may also want to adopt, review, and/or update their policies to protect their proprietary information and address confidentiality expectations, and train employees consistently...and often. Comprehensive workplace policies are effective ways to buttress or even supplant post-employment contractual restrictions. In fact, most employers likely already have codes of conduct and confidentiality policies addressing how employees are to handle sensitive and proprietary information. Consider revisiting and updating those now to be sure they are as robust as needed for your particular business interests. And be sure to train all employees on the applicable policies, especially front-line managers who are likely to be the people enforcing these policies.

The legal issues impacting this topic are and will continue to be ever-changing (Employment Law in Motion!), and since publication of this blog post, new or additional information not referenced in this blog post may be available.

This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.