Comments
While employers still should be familiar with what it would have to do to comply with the noncompete rule in the event the injunction is removed in the future, there are other pending challenges to the noncompete rule, and they are unlikely to be resolved for the foreseeable future. Below, we provide a summary of these pending challenges, set out steps employers can take to mitigate their antitrust exposure, and highlight certain points regarding state noncompete laws.
In more detail
Status of the legal challenges to the FTC's Noncompete Rule
The FTC's noncompete rule, which would have banned employment noncompetes under most circumstances, was originally slated to take effect on September 4, 2024. (Please see our previous alerts on the FTC's noncompete rule here, here, and here.)
After the final rule was issued, three federal lawsuits were filed. Here is where each case currently stands:
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Ryan LLC et al. v. FTC (Northern District of Texas)2. On August 20, 2024, Judge Ada Brown issued a nationwide injunction barring the noncompete rule from going into effect. Judge Brown found the FTC does not have authority to issue substantive rules and that the noncompete rule was "arbitrary and capricious" under the APA due to FTC's failure to build an adequate record and consider more narrow alternatives. The court previously issued a preliminary injunction on July 3, 2024, which at the time only enjoined the noncompete rule with respect to enforcement against the named plaintiff and certain trade associations that intervened in the action (including the US Chamber of Commerce).
- ATS Tree Services LLC v. FTC (Eastern District of Pennsylvania)3. On July 23, 2024, Judge Kelley Hodge reached the opposite conclusion to Judge Brown and issued an opinion refusing to grant plaintiff's request for a preliminary injunction. Judge Hodge held that the FTC had broad authority to issue substantive rules, like the noncompete rule, and that it did not raise any serious constitutional questions. Judge Hodge also found that the plaintiff failed to demonstrate that enforcement of the noncompete rule would cause plaintiff irreparable harm. The plaintiff subsequently asked the court to rule on the parties' cross-motions for summary judgment by November 27, 2024.
- Properties of the Villages, Inc. v. FTC (Middle District of Florida)4. On August 15, 2024, Judge Timothy Corrigan of the Middle District of Florida entered a preliminary injunction prohibiting enforcement of the rule against the named plaintiff only. Like Judge Brown in Ryan LLC, Judge Corrigan found that the FTC lacked the statutory authority to issue the noncompete rule. Judge Corrigan also departed from the opinion in ATS by finding that the noncompete rule raised constitutional concerns under the "Major Questions" doctrine (which allows an agency to decide issues of "major national significance" only if supported by "clear" congressional authorization).
Recommended action
Federal law considerations
While the noncompete rule will not be effective soon, there are various steps employers can take to address future compliance concerns and limit potential antitrust risk presented by any noncompete provisions they have in existing employee contracts:
- Determine which workers would be entitled to notice that their noncompetes cannot be enforced in the event the noncompete rule were to become effective. Under the noncompete rule, companies that have existing noncompetes with "workers" (i.e., employees, independent contractors, externs, interns, volunteers, apprentices and certain sole proprietors who are in the United States but are not “senior executives”) would need to be provided "clear and conspicuous" notice that their noncompetes will not and cannot be enforced against the worker. Therefore, employers should inventory and determine which workers would be entitled to notice—in the event the rule were to become effective. To capture the full range of workers who may be entitled to notice, employers should review all current noncompete agreements with employees and independent contractors; review any employment policies or handbooks that purport to bind workers to noncompetes; and check offer letters, employment agreements, stock option and other equity award agreements, severance arrangements, and other compensation-related agreements.
- Prepare notice regarding potential future enforcement of noncompetes in the event the rule is reinstated. Companies should consider developing a model notice to send employees subject to a noncompete that would be prohibited by the noncompete rule. The notice would have to inform the employees that their noncompetes will not be enforceable if the noncompete rule were to go into effect later. The FTC has provided model language, but employers can use their own language as long as the notice explains that the worker's noncompete clause is no longer effective and cannot be enforced. Employers should continue to monitor the ongoing cases.
- Thoughtfully consider imposition of noncompetes on new hires. Employers should take a more tailored approach towards new hires, and limit noncompetes to employees where the company can demonstrate such provisions are aimed at protecting employee-specific investments and high value assets like trade secrets. Employers should also keep an inventory of any such noncompetes imposed on new hires so that they readily provide them with the requisite notice if the noncompete rule ultimately stands.
- Consider limiting enforcement against noncompetes. While the FTC rule will not become effective anytime soon, the FTC still has authority to launch investigations and engage in case-by-case challenges against employers for overbroad or inappropriate noncompetes (although the likelihood that the FTC would initiate individual enforcement actions seems low while litigation against its noncompete rule is pending). Employers should, therefore, keep an eye on the ongoing challenges to the rule, and carefully consider whether to seek enforcement of a noncompete against an employee during this period.
Don't forget about state noncompete laws
States are increasingly taking steps to restrict noncompetes. Four states (i.e.,California, North Dakota, Oklahoma, and Minnesota) essentially ban all noncompetes with employees (subject to certain narrow exceptions, such as for certain sales of businesses). In addition, multiple states have also recently limited the use of noncompete agreements for low-wage earners, including Colorado, Illinois, Washington, Maine, Maryland, New Hampshire, Oregon, Rhode Island, and Virginia.
The trend towards restricting noncompetes at the state level is increasing, with certain states recently imposing additional restrictions and obligations to already existing laws.
Employers managing remote teams subject to noncompete restrictions across multiple states need to be especially vigilant about adhering to the laws in each state where their employees are located. Accordingly, employers should:
- Regularly review for new laws and pending legislation, and update their noncompete agreements to ensure they meet current legal standards.
- Become familiar with (and calendar) any time-based prescriptive changes in state laws. For instance, the salary thresholds in Illinois's existing state noncompete law increase on a regular basis—USD 5,000 every five years until reaching USD 90,000 in 2037 for noncompetes, and USD 2,500 every five years until reaching USD 52,500 in 2037 for nonsolicitation agreements.
- Assess the most important business interests to protect, and focus noncompetes on key employees who require specialized training or have access to confidential and trade secret data that would harm the company if disclosed or used.
- Where state law restricts noncompetes, consider alternative ways to protect sensitive information, including nondisclosure, IP rights, and trade secrets agreements.
Related content: United States: Federal Judge blocks FTC's ban of noncompete covenants
Competition Knowledge Lawyer, Natalie Flores contributed to this article.
1 See, Ryan LLC v. Fed. Trade Comm'n, Civil Action 3:24-CV-00986-E, 32 (N.D. Tex. Jul. 3, 2024).
2 Id.
3 ATS Tree Services, LLC v. FTC, No. 2:24-cv-1743 (E.D. Penn.) (Apr. 25, 2024).
4 Properties of the Villages v. FTC, No. 5:24-cv-00316-JSM-PRL (M.D. Florida) (Ocala Division) (Jun. 21, 2024).
