Employers Face Waiting Game as Court Weighs Nationwide Block to Sept. 4 Noncompete Ban

It’s estimated that up to 30 million Americans, or one out of five workers, is subject to a noncompete agreement. That could all change on Sept. 4, 2024, when the Federal Trade Commission’s (FTC) ban on noncompete agreements is scheduled to go into effect. Under the ban, employers are required, as of that date or earlier, to send individualized notices to all employees subject to such a restrictive covenant that the employer will no longer seek to enforce the noncompete.

With a legal challenge to the ban still pending, employers nationwide face the choice of either sending out the notices now or waiting to see what a federal district court in Texas decides to do later this month.

In April 2024, the FTC issued its final rule, banning any new noncompete agreements and rendering all preexisting agreements unenforceable, except those for senior policymaking executives earning at least $151,164 per year. The FTC’s stated rationale for the ban is that such agreements are exploitive, deprive workers of the freedom to change jobs, result in lower wages, and stifle the creation of new businesses.

Legal challenges came quickly. On July 3, 2024, the United States District Court for the Northern District of Texas issued a partial injunction, blocking the FTC from enforcing the rule against a coalition of business groups. U.S. District Court Judge Ada Brown ruled that the FTC lacked statutory authority to issue the ban via rulemaking, but declined at that time to extend the injunction nationwide, and limited it to the specific plaintiffs in the case. The plaintiffs have since renewed their request for a nationwide injunction, and Judge Brown is expected to decide no later than Aug. 30, 2024, just a few days before the ban is to go into effect.

The FTC has also scored an early victory. A tree trimming service filed a similar lawsuit seeking an injunction, which was denied by the U.S. District Court for the Eastern District of Pennsylvania. This court held that the FTC acted within its statutory duty in designating noncompetes an unfair method of business competition.

The mixed messages from these court decisions put employers in an awkward position. They can hold off on issuing the required notices in hope that the Texas court’s decision reached by Aug. 30 will extend the injunction nationwide. However, if the Northern District of Texas maintains the limitations on the injunction, employers across the country will be scrambling to meet the FTC’s Sept. 4, 2024, deadline to send notices to employees currently subject to noncompetes. If the ban goes into effect, the FTC can impose equitable and monetary penalties against employers for noncompliance.

One option for employers may be to prepare the notices for any affected employee and see what the Texas court ultimately decides by the end of August. However, all employers should consult with their legal counsel before sending any such notices, to determine the best option in their individualized circumstances. In the FTC’s rule in the Federal Register, it provides a sample notice that would comply with the requirements of the ban, as follows:

A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a noncompete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any noncompete clause against you. This means that as of

[DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME]:

• • You may seek or accept a job with any company or any person – even if they compete with [EMPLOYER NAME].
  • You may run your own business – even if it competes with [EMPLOYER NAME].
  • You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

 

The FTC’s new rule does not affect any other terms and conditions of your employment. For more information about the rule, visit [link to final rule landing page]. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at [URL on FTC’s website].

Employers have traditionally used noncompete agreements as a way to protect trade secrets as well as other confidential customer or business information. While the future of noncompete agreements remains uncertain, employers should take advantage of the remaining time before Sept. 4 to make sure that their existing confidentiality policies and agreements are updated and sufficient to protect their legitimate business interests. 

Contact Mark Fijman or any member of Phelps’ Labor and Employment team if you have questions or need advice and guidance.