Latest on FTC Rule Banning Employment Restrictive Agreements

In a previous post, LCOJ’s Employment Team discussed the U.S. Federal Trade Commission’s (“FTC”) publication of a final rule (the “Rule”) implementing a nationwide ban on non-compete agreements (“NCAs”). As predicted, the Rule has faced numerous legal challenges to its validity. Lawsuits were filed against the FTC in Texas, Pennsylvania, and Florida federal district courts, each seeking injunctive relief and a stay of the September 4, 2024 effective date.

To date, the various courts’ decisions have been divergent:

• On July 3, 2024, the Texas court held that the plaintiffs were likely to succeed on the merits of their claim (a prerequisite to an award of injunctive relief) that the FTC lacked the constitutional authority to implement the Rule. The court promised a final ruling on the merits by August 30, 2024—five days prior to the effective date.

• On July 23, 2024, the Pennsylvania court denied the plaintiff’s request for injunctive relief holding that the plaintiff did not show it would suffer irreparable harm (also a prerequisite to an award of injunctive relief), and that the FTC had the proper statutory authority to issue the Rule (i.e., that the plaintiff would not succeed on the merits).

• The Florida case was filed on June 21, 2024, and the FTC filed its response on July 25, 2024. The Florida court has yet to rule.

With the September 4th effective date right around the corner, employers are seeking answers on how to respond as the Rule continues to make its way through the legal system. Here is what we know:

• The Texas court is anticipated to grant a nationwide injunction or vacate the Rule entirely. In either case, the Rule would not go into effect.

• Both the Texas and Pennsylvania cases are expected to be appealed to the federal appeals court in their respective federal circuits. It is also widely anticipated that the U.S. Supreme Court will weigh in on the FTC’s ability to promulgate the Rule following the federal appeals court decisions (regardless of the outcomes).

• The FTC Act does not provide a private cause of action allowing workers to seek enforcement of the Rule. Only the FTC may obtain a cease and desist order from an administrative law judge to enforce failure to comply with the Rule, including the notice provisions. Moreover, penalties are only available if the employer violates the ALJ’s final cease and desist order.

Accordingly, while we await the Texas court’s ruling on the merits (and ensuing appeals), employers should begin to consider the following:

• Identify “senior executives” who hold “a policy-making position” and who earn at least $151,164 per year. Recall, the Rule does not apply to NCAs entered into with senior executives prior to the effective date.

• Evaluate whether there are senior executives, who should sign NCAs before the Rule’s effective date. All NCAs signed after the effective date, including those with senior executives, are banned.

• Review your non-disclosure (confidentiality) and non-solicitation agreements for “reasonableness” under the Rule as the Rule could apply to such agreements to the extent they inhibit the employee’s freedom to seek alternative employment.

• Prepare an inventory of NCAs, bearing in mind that an NCA is an agreement (or a portion thereof) “that prohibits a worker . . . from seeking or accepting work in the United States.” In other words, employers should cast a wide net in taking inventory of their existing NCAs which could appear in a multitude of employment-related agreements, including, but not limited to, employment agreements, severance agreements and independent contractor agreements.

• Prepare (but do not send) the so-called “safe-harbor” notice to all workers who signed an NCA (including, but not limited to, all former employees) informing them that their NCA cannot and will not be enforced against them. You will want to have a discussion with your attorney before sending the “safe-harbor” notices so as to understand the pros and cons of sending (or not sending) such notices.

LCOJ’s team of employment lawyers will continue to monitor developments associated with the legal challenges to the Rule and standby ready to evaluate the best strategies for your organization in this challenging legal environment.

Written By:
Law Firm of Conway, Olejniczak & Jerry, S.C.