Written by Claire E. Bailey, John F. Bowen and Dana E. Stutzman from Hall Render Killian Heath & Lyman PC on June 21, 2024
As previously discussed here, on April 23, 2024, the Federal Trade Commission (“FTC”) voted to adopt a final rule banning a majority of workers’ non-compete clauses (“Final Rule”). The Final Rule is set to go into effect on September 4, 2024. Nevertheless, pending litigation may delay the Final Rule or negate it entirely, and a decision is expected from the court on July 3, 2024.
After its adoption, two lawsuits were filed quickly to vacate the Final Rule. The first was filed on the same day as the FTC vote by Ryan, LLC (“Ryan”), a global tax services and software provider. In its complaint, Ryan asserted that the FTC does not have statutory authority to pass substantive rules regarding unfair methods of competition and cannot promulgate a rule that invalidates 30 million employment contracts. Instead, Congress must pass a law that expressly permits invalidation. Additionally, Ryan argued that the FTC cannot implement a non-compete ban that preempts 46 state laws.
The second lawsuit was filed one day after the FTC vote by the U.S. Chamber of Commerce (“Chamber of Commerce”). The Chamber of Commerce also asserted in its complaint that the FTC does not have statutory authority to pass a non-compete ban. Additionally, it argued that a categorical ban is inconsistent with history and precedent and is an improper interpretation of federal law. The Chamber of Commerce claimed that the information before the FTC did not support its categorical ban, nor did the agency give sufficient time to consider alternative proposals.
Both complaints were filed in federal courts in Texas, a historically employer-friendly state. However, as a result of several procedural filings, the Chamber of Commerce joined the Ryan lawsuit and dropped its separate action. In addition to the complaint, the plaintiffs filed a motion to stay the Final Rule and sought a preliminary injunction against its enforcement until the court can rule on the case’s merits. The court is expected to rule on this motion in early July. If the court finds in favor of the plaintiffs, the Final Rule will be stayed, thereby halting the implementation of the ban on worker non-compete agreements.
If the ruling does not bar enforcement of the FTC’s Final Rule, employers will have a few months to prepare and organize for the September 4, 2024, compliance deadline.
Practical Takeaways
- Should the court rule in favor of the FTC, employers should prepare notice to employees. The Final Rule, if it goes into effect, requires employers to provide notice to employees that the non-compete will not be enforced. The notice can be delivered by hand delivery to the worker, mailed to the worker’s last known street address, emailed to their email address or last known email address or texted to the worker’s mobile phone.
- If the court does not stay the Final Rule and grant a preliminary injunction, employers should consider other restrictive covenants and/or retention incentives. Some examples of other restrictive covenants are non-solicitation agreements, lawful training repayment agreement provisions, sign-on bonuses, retention bonuses, etc.
