On April 23, 2024, the Federal Trade Commission (FTC) approved a Final Rule that dramatically changes the landscape for non-compete agreements in the United States. Set to take effect on September 4, 2024, this rule prohibits almost all non-compete clauses between employers and workers. This rule is a significant regulatory development, potentially affecting millions of workers and businesses across the country. However, the rule's future is uncertain, with several ongoing legal challenges that could alter or delay its implementation.
Given the ongoing legal challenges and the potential for changes to the rule, it is imperative that businesses remain vigilant and informed. The next few months will be critical as courts continue to address the rule's legality, and employers must be prepared to adapt to any developments that may arise.
For additional information regarding the FTC's non-compete rule, and to find out how this could impact your business, please contact our Managing Partner, Richard Liu, at richard.liu@consultils.com.
Understanding the FTC's Rule
Background:
Non-compete agreements have long been controversial, particularly regarding their impact on worker mobility, wage growth, and competition. The FTC’s decision to implement a broad ban on these agreements is based on concerns that they restrict competition and harm workers. This rule represents a significant shift in federal policy, aiming to enhance worker mobility and promote a more competitive labor market.
Please refer to our previous article for more details: FTC – Final Rule Banning Most Non-Compete Agreements.
Notable Provisions Include:
Prohibition of Non-Compete Clauses: Employers are barred from entering into or enforcing non-compete agreements with employees and independent contractors after September 4, 2024.
Senior Executives: While the rule allows for the maintenance of existing non-compete agreements with senior executives—those earning over $151,164 annually and holding policymaking positions—it prohibits the formation of new non-compete agreements with these individuals after the effective date.
Exceptions: The rule does not apply to non-competes formed as part of a bona fide sale of a business and allows enforcement of non-competes where the cause of action accrued before September 4, 2024.
Notice Requirement: One critical aspect is the Notice Requirement: Employers must notify workers that their non-compete agreements will not be enforced if the agreements are covered by the rule. This notice must be clear, conspicuous, and delivered individually to each affected worker by hand, mail, email, or text by the rule's effective date.
The rule also addresses other restrictive covenants, such as non-disclosure and non-solicitation agreements, which may be treated as non-competes if they effectively prevent workers from seeking other employment or starting a business.
Latest Challenges: What Employers Need to Know
Legal Opposition and Judicial Review
The FTC’s rule, while aimed at promoting worker mobility and competition, has triggered significant legal opposition. These challenges question both the FTC’s authority to impose such a comprehensive regulation and the constitutionality of the rule itself. The primary legal challenges include:
Federal Authority vs. State Law: Critics argue that the FTC has overstepped its jurisdiction by imposing a nationwide ban on non-compete agreements, which have traditionally been governed by state law. This federal overreach is a key point of contention in the legal challenges.
Major Questions Doctrine: The doctrine requires clear congressional authorization for significant regulatory actions that affect large parts of the economy. Opponents claim that the FTC lacks this explicit mandate to enforce such a broad prohibition on non-competes.
Non-Delegation Doctrine: This challenge centers on whether the FTC’s reliance on the “unfair methods of competition” clause in the FTC Act constitutes an unconstitutional delegation of legislative power. Plaintiffs argue that the clause is too vague to support such sweeping regulation without specific guidance from Congress.
Chevron Deference: This principle, which typically allows courts to defer to a federal agency’s interpretation of ambiguous statutes, is also under scrutiny. If courts limit or reject Chevron Deference in this context, it could weaken the FTC’s ability to defend the rule.
Key Cases to Watch and Potential Outcomes
The FTC’s non-compete rule is currently under legal scrutiny in multiple federal courts. The outcomes of these cases are crucial, as they could determine whether the rule will be implemented, modified, or struck down. Below are the key cases that employers should monitor:
1. Ryan v. FTC (Northern District of Texas)
Case Background: Ryan LLC, a tax services firm, was the first to challenge the FTC’s rule, arguing that the agency lacks the statutory authority to implement such a sweeping regulation and that the rule violates the Administrative Procedure Act (APA).
Court Action: On July 3, 2024, the court issued a preliminary injunction, temporarily halting the rule’s enforcement against the plaintiffs. The court raised significant questions about the FTC’s authority and the legitimacy of the rulemaking process.
Potential Impact: A final ruling is expected by August 30, 2024. If the court rules in favor of Ryan LLC, it could set a precedent that leads to broader injunctions, potentially preventing the FTC from enforcing the rule nationwide.
2. ATS Tree Services LLC v. FTC (Eastern District of Pennsylvania)
Case Background: ATS Tree Services LLC filed its challenge shortly after the FTC’s rule was announced, contending that the rule encroaches on state authority and is detrimental to businesses that rely on non-compete agreements to protect trade secrets.
Court Action: On July 23, 2024, the court denied the plaintiff’s motion for a preliminary injunction, allowing the rule to proceed in Pennsylvania. However, the plaintiffs may appeal this decision, which could further complicate the rule’s implementation in the state.
Potential Impact: If an appeal is filed and successful, it could delay the rule’s enforcement in Pennsylvania and potentially influence rulings in other jurisdictions.
3. Properties of the Villages Inc. v. FTC (Middle District of Florida)
Case Background: Properties of the Villages Inc., a real estate company, challenged the FTC’s rule on similar grounds, asserting that it overreaches federal authority and harms business operations.
Court Action: The court has scheduled a hearing on a preliminary injunction for August 14, 2024. The outcome of this hearing will be critical in determining whether the rule faces additional judicial obstacles.
Potential Impact: A ruling in favor of the plaintiffs could lead to another injunction against the FTC’s rule, potentially expanding the legal challenges and delaying or blocking the rule’s implementation in Florida and possibly beyond.
Strategic Recommendations for Employers
In light of the significant legal uncertainty surrounding the FTC’s non-compete rule, we recommend that employers take the following proactive steps to mitigate potential risks and ensure compliance:
Audit Existing Agreements: Review all current employment contracts to identify non-compete clauses. Assess the potential impact of the FTC’s rule, especially in jurisdictions with ongoing legal challenges.
Strengthen Protective Measures: Enhance non-disclosure agreements (NDAs) and confidentiality agreements to safeguard proprietary information if non-competes are restricted. Consider alternative strategies like retention bonuses or garden leave provisions.
Prepare for Compliance: Draft clear employee notices regarding changes to non-compete enforcement, as required by the FTC’s rule. However, delay distribution until the legal situation is clearer. Be ready to act swiftly once the rule’s fate is determined.
Monitor Legal Developments: Stay updated on the latest legal developments. Regular updates to legal and HR teams are crucial for navigating the evolving regulatory landscape. Consulting with legal counsel is advisable for tailored advice and support.
For additional information regarding the FTC's non-compete rule, and to find out how this could impact your business, please contact our Managing Partner, Richard Liu, at richard.liu@consultils.com.
Richard Liu, Esq. is the Managing Counsel of ILS. He serves clients as a management-side defense lawyer specializing in employment and business litigation. Richard is also an expert on litigation prevention and compliance. He regularly advises Fortune 500 companies and startups on employment, labor, and commercial matters.
Email: richard.liu@consultils.com | Phone: 626-344-8949
*Disclaimer: This article does not constitute legal opinion and does not create any attorney-client relationship.
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