Business and Legal Insights

In April 2024, the Federal Trade Commission (FTC) adopted a Rule banning most non-compete provisions in the employment setting, with an effective date of September 4, 2024. Thus far, there have been three major federal decisions on the Rule, two halting its enforcement — currently as to the parties to the cases only — and the other upholding the Rule. Given the rapidly approaching effective date, and the uncertainty as to the Rule’s ultimate fate, employers should quickly and carefully consider their plans to comply with the Rule. While employers should consult with qualified counsel regarding their specific circumstances, below are some general guidelines on next steps for consideration.

It is important to note that the FTC Rule generally bans only non-competition restrictions with employees and contractors (referred to together here as “employees”) that prevent them from competing with their former employer after their employment ends. It does not ban non-competes while a person is actively employed, and does not ban non-competes in connection with a sale of a business or certain other business contractual relationships. It also does not apply to non-solicitation agreements, unless they operate as a “de facto” non-compete provision under the particular circumstances.

The Rule generally requires employers to (1) notify all current and former employees (other than a limited exception for Senior Executives, discussed below) that non-competes in violation of the Rule will not be enforced starting September 4, 2024; and (2) cease requiring any employees to enter into any new non-competes. 

1. Locate and evaluate all applicable agreements and employee contact information.

The first step to issuing the required notices is to identify which employees are currently bound by a non-compete agreement. In addition to employment and independent contractor agreements, non-compete provisions with employees may be contained in a variety of other documents, such as NDA/confidentiality agreements, restrictive covenant agreements, offer letters, settlements and releases, severance agreements, equity award/compensation agreements, and other employment and business transaction agreements. Employers should act now to check all agreements with current and former employees, and identify all non-compete provisions with current employees that survive the employee’s separation of employment, and with former employees that are currently in effect and extend beyond September 4, 2024. Counsel should be consulted to determine whether specific provisions potentially violate the Rule or may otherwise be unenforceable in the applicable jurisdiction.

Employers should also locate current contact information for past and current employees to whom required notices must be sent.  While this may be an easier task for current employees, you still have an obligation to try to obtain current contact information for former employees who are entitled to receive the notice.  The notice can be sent out via mail, text, email, or an in-person notification, so any contact information can be helpful even if you do not have a current mailing address.

2. Prepare to issue the required notices before September 4, 2024.

Employers should start preparing the notices required by the Rule that must be given to all current and former employees with active non-competes.  Because the Rule may be invalidated before the effective date of September 4, it may make sense to wait until shortly before September 4th to send the notices.  However, depending on the size of your organization it may take days or even weeks to prepare the notices, so you should not wait. The FTC has provided a form for the required notice that will provide safe harbor if timely provided to employees. 

Employers may wish to consult with counsel regarding the form, timing, and content of the notices, including whether current court rulings require the sending of the notices, and whether to include additional language in the notices regarding exactly what part of a restrictive covenant will no longer be enforced and what may still be enforceable, what happens if the Rule is ultimately struck down after the notice is sent, as well as language regarding the continued enforceability of other aspects of the agreements.  It is advisable to have the notices ready to go in case the Rule becomes effective September 4th.

3. Revise your agreements with employees or develop other plans to protect your interests in the event the Rule becomes effective.

In addition to removing banned non-compete provisions from all employment agreements or similar documents, going forward, employers should consider whether and what other agreement provisions, including confidentiality, non-solicitation, non-disclosure, non-recruitment of employees, and training repayment provisions, may achieve some of the same objectives without violating the Rule. In addition, employers should reevaluate their compensation strategies, including retention bonuses, vesting of incentive compensation, and post employment or “garden leave” compensation, in an effort to retain talent and otherwise adjust to the Rule’s ban on non-compete provisions. The advisability of such provisions and policies will likely be fact and jurisdiction specific, so consultation with counsel is recommended. In addition, employers will need to determine how existing agreements will be changed (e.g. unilaterally, by agreed addendum, or new agreement) and whether payment or other consideration may be necessary to ensure enforceability.

4. Take additional steps to protect confidential business information and trade secrets.

One of the main reasons that employers use non-compete provisions is to prevent competitors from using their valuable business information. But there are additional methods to minimize the use and disclosure of this information. In addition to the alternative provisions mentioned above, employers can take additional steps to protect information, including controlling and monitoring access to critical information, enhancing the security of company systems and data, and periodic monitoring and assessment of the company’s intellectual property and efforts to protect it.

5. Evaluate and possibly amend agreements with “Senior Executives”.

If entered into before the effective date of September 4, 2024, non-compete agreements with Senior Executives — defined as employees in policymaking positions making at least $151,164 annually — may still be enforceable. Employers cannot enter into new non-competes with Senior Executives after September 4, but if a current or former Senior Executive has a non-compete as part of their current or former employment agreements, and that restricts competition for a period of time after employment, then it may be exempt from the Rule. Accordingly, employers should determine whether and what additional provisions should be included in agreements with such Senior Executives, and plan to have the revised agreements executed prior to September 4, 2024. In addition to determining whether consideration is needed to support any modifications to these agreements, employers should also consult with counsel and plan to avoid accidentally sending potential notices, or taking other actions, that could render unenforceable non-compete agreements with Senior Executives that would otherwise remain permissible if entered into prior to September 4, 2024.

6. Monitor significant cases for new developments and be prepared to adjust quickly and accordingly.

In Ryan v. Federal Trade Commission, the Northern District of Texas temporarily halted enforcement of the Rule and delayed its September 4, 2024 effective date, but only as to the named parties to that particular litigation. The District Court, however, is expected to issue a ruling by August 30, 2024.  It is possible that the Court could vacate the Rule, with a potential effect of nationwide invalidation. Similarly, in Properties of the Villages, Inc. v. Federal Trade Commission, pending in the Middle District of Florida, the District Court temporarily enjoined enforcement of the Rule recently, but only as to the parties to the case, following a hearing on August 14, 2024.

In the Eastern District of Pennsylvania, however, the District Court went a different direction. There, in ATS Tree Services, LLC v. Federal Trade Commission, the Court denied a small tree company's request for a preliminary injunction that would have stopped the FTC Rule from taking effect September 4th. All three of these cases remain pending, appeals are highly likely, and it may be some time before the issue is definitively resolved. Counsel should be consulted regarding the impact of these and other court rulings, and employers should keep key leaders and other personnel informed of the latest developments and be prepared to change policies, procedures, and documents accordingly. 

While uncertainty remains as to the validity and effect of the FTC’s non-compete Rule, employers should be proactive.  Consider consulting with counsel to be prepared to comply with the Rule well before its scheduled September 4, 2024 effective date. If you have questions about how to comply with the Rule, please contact any member of the Shutts Labor and Employment Practice Group, or feel free to send an email to FTCrule@shutts.com.

This alert provides general background information about publicly available material as of the date of this alert. This alert is intended for educational purposes only and does not replace independent professional judgment.  Before acting on any information you should consult with legal counsel.  The content of this presentation is proprietary and confidential and is not intended to be distributed to third parties without the written consent of Shutts & Bowen LLP.