By Nicholas J. Fiorenza, Ferrara Fiorenza PC & PGCA Association Counsel
August 21, 2024 – Here is an update to the FTC Ban announcement.
Court Blocks FTC’s Ban on Non-Competition Agreements
We circulated an article yesterday about preparing for the Federal Trade Commission’s upcoming ban on non-competition agreements. What a difference a day makes!
A federal judge in Texas has now blocked the implementation of the rule which was scheduled to go into effect on September 4.
According to the Judge, the FTC does not have the authority to adopt such broad rules to combat what it believes to be unfair methods of competition. Even if the FTC had the power to adopt such a rule, the Judge noted, the Commission has not justified banning virtually all non-competition agreements. Specifically, the ruling notes:
“The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition … instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.”
The FTC is considering a potential appeal, so stay tuned.
August 20, 2024 Alert:
Most law firm clients have experienced the frustration of looking for a “yes” or “no” answer on a particular legal question only to be told by their counsel that there is no such simple answer. This is especially so in the employment law context, where so much counseling involves not just straightforward compliance advice but also the development of thoughtful strategies that will yield the best possible result for the client.
Understanding and addressing the circumstances surrounding the Federal Trade Commission (FTC) rule banning non-competes is a prime example. At first glance, the situation seems straightforward. In 2021, as part of a sweeping platform calling for the overhaul of long-accepted aspects of employment and labor law, President Biden urged the FTC to develop a rule eliminating noncompete clauses in employment agreements. These agreements, the administration argued, were destructive to free business competition, the economy, and simply unfair to the employees who worked under them.
After an extended rulemaking process and comment period, the FTC, on April 23, 2024, issued its final rule banning virtually all non-competition clauses in the employment setting. Unlike some state and local jurisdictions which have taken similar action, the FTC’s rule carved out two noteworthy exceptions. The first continues to recognize existing noncompete clauses with a company’s senior executives. An executive is considered “senior” when they have truly effective decision-making authority over corporate policy significantly impacting their business and are paid at least the salary threshold established by the rule. The second exception continues to allow non-compete agreements that are negotiated as part of the sale of a business.
The FTC‘s rule is effective on September 4, 2024, and obligates employers to take the affirmative step of notifying impacted current and former employees that their non-complete clauses are no longer enforceable. Penalties for violating the rule, which would be a violation of section 5 of the FTC Act, include financial penalties and judicial (injunctive) relief against the employer.
Two significant legal challenges arose almost immediately in federal district courts in Pennsylvania and Texas. Recently, the Pennsylvania federal court refused to issue an injunction stopping enforcement of the rule. Significantly, the Court telegraphed that it believed the rule was proper and unlikely to be invalidated. Commenting on the issue of possible agency overreach, the Court noted that the FTC has the authority to ban noncompete agreements nationwide.
Meanwhile, a federal court in Texas will soon rule on similar issues covering its jurisdiction. Many commentators believe that the Texas federal court will reach the opposite conclusion. This means that, ultimately, the issue could very well be decided by the US Supreme Court. One thing is clear, this matter will not be resolved before the rule’s September 4, 2024, effective date. So, other than for the plaintiffs in the Texas federal court case, employers across the US are faced with a rule that will likely become effective at that time.
Employers are considering various compliance strategies concerning their non-compete agreements. For some, the matter is straightforward. On or shortly after September 4, these employers will be sending notices to their effected employees and former employees advising them that their non-compete agreements are no longer valid. The FTC has provided a form notice for this purpose. Further, any other employment contracts or standalone noncompete covenants in the works are being discarded.
Other employers are analyzing which employees are covered by the ban and the senior executive exemption but are choosing to hold off on further action in hopes that there will be more clarity regarding the issue soon. In this regard, no one can predict how active the FTC will be with respect to compliance efforts but, in any case, seeking to enforce a noncompete agreement – something that is generally difficult – becomes even more so in this climate.
There are other recommended strategies to address this issue. They range from concentrating on other protective contractual provisions such as non-solicitation, confidentiality and broad intellectual property protections, to ramped-up employee retention efforts that would inspire employees to stay with their employer in the first place.
This issue is fluid, and members are urged to stay tuned for further developments. Members are also encouraged to reach out to Association Counsel and staff for help in analyzing their specific situations and developing their own effective strategies.
Nicholas J. Fiorenza
Association Counsel
Ferrara Fiorenza PC
(315) 437-7600
August 19, 2024
