Employers Face Compliance Uncertainty with the Pending Legal Challenges to the FTC’s Rule Banning Non-Compete Agreements

In April, the Federal Trade Commission published a final rule banning the enforcement of most non-compete agreements. The rule was immediately challenged in federal court to prevent it from going into effect. In one of those challenges, a federal district court issued a preliminary injunction postponing the rule’s effective date for the plaintiffs there. The court, however, declined to issue a nationwide injunction that would have prevented the rule from becoming effective for all employers. The court has promised to issue a final ruling there by August 30, 2024, and it is still possible that the ruling will result in a nationwide injunction. Other courts are considering similar challenges, which could likewise prevent the rule from going into effect nationwide.

Without judicial intervention, though, the FTC’s rule banning most non-compete agreements will become effective on September 4, 2024.

The most immediate concern for employers is how to handle the rule’s notice requirements on or before that date. Under those requirements, employers must provide written notice to many current and previous workers “that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” 16 C.F.R. § 910.2(b)(1)–(2).

Giving this notice could have negative implications on the enforcement of non-compete agreement if the courts later find that the FTC exceeded its authority and invalidate the rule. This uncertainty creates three general options for employers while we wait to see whether a court will block the FTC’s rule:

1. Employers can comply with the notice requirements before September 4, 2024. The FTC has provided model language and a safe harbor provision for compliance. A principal risk with this option is that sending the notice could likely render your non-compete agreements unenforceable if a court later strikes down the FTC’s rule.
2. Employers can consider giving notice in a way that tracks the rule’s notice requirements, while at the same time including language making clear that the FTC’s rule is subject to legal challenge and that if the rule is invalidated, the non-compete will remain enforceable.
3. Employers can also consider not giving the notice required by the challenged rule. Under this option, employers would face the principal risk of the FTC initiating administrative proceedings seeking a cease-and-desist order or seeking an injunction in federal court. There may also be some risk that the FTC could attempt to pursue civil penalties if the FTC obtains a cease-and-desist order and the employer violates that order. 15 U.S.C. § 45(l).

In addition, while those legal challenges play out, employers should begin considering other possible ways to protect their business interests, such as non-disclosure and non-solicitation agreements. It is also worth noting that non-competes with certain policy-making executives executed prior to September 4, 2024, are insulated from the FTC’s rule and can continue as written.

How each organization chooses to manage the risks associated with the uncertainty surrounding the FTC’s rule may be different and will depend on your specific circumstances, including the importance of business interests protected by any non-compete agreements that you have in place. Accordingly, we encourage you to discuss your options with your Miller Johnson employment attorney.