In May 2024, OlenderFeldman LLP notified its clients of the Federal Trade Commission’s (FTC) final rule banning nearly all non-competes and invalidating those non-competes below a senior executive level (“Non-Compete Rule”).
This sweeping Non-Compete Rule has sparked legal challenges across the country, with federal lawsuits filed in Texas, Pennsylvania, and Florida seeking to block or delay the implementation of the ban, raising important questions for employers and employees alike. While these lawsuits are ongoing, and absent a judicial order granting nationwide injunctive relief, the Non-Compete Rule is still currently set to go into effect as of September 4, 2024.
While a final decision from the Texas court (expected by August 30, 2024), might result in suspension of the rule across the country, OlenderFeldman LLP has prepared this follow-up FAQ to provide practical guidance to your business if in fact the Non-Compete Rule actually goes into effect on September 4, 2024.
What is the FTC’s Non-Compete Rule?
The FTC’s Non-Compete Rule aims to prohibit the use of non-compete agreements in employment contracts across all industries, subject to limited exceptions. If enacted, this rule would render existing non-compete agreements void and unenforceable, and it would prevent employers from requiring new non-compete clauses in their employment contracts. Read our prior FAQ on the Non-Compete Rule here.
What is the status of the Non-Compete Rule given the legal challenges to its enforcement already underway.
Private businesses in several states, including Texas, Pennsylvania, and Florida, have filed lawsuits challenging the legality and constitutionality of the Non-Compete Rule. These plaintiffs argue that the FTC overstepped its authority by issuing a nationwide ban on non-competes. They claim that such regulations should be determined at the state level, not by a federal agency. Additionally, these lawsuits argue that the proposed rule could have severe economic consequences, particularly in industries where non-competes are common, such as technology, healthcare, and sales.
Recently, federal district courts in Texas, Florida and Pennsylvania have issued conflicting interim decisions, with the Texas and Florida district courts issuing preliminary injunctions preventing the rule from applying to certain private plaintiffs and the Pennsylvania court declining the request for an injunction. No court has yet ruled on the merits, but the Texas federal district court will rule next week.
Could these lawsuits delay the implementation of the FTC’s Non-Compete Rule?
Yes, these lawsuits have the potential to delay or even prevent the Non-Compete Rule from going into effect on September 4, 2024 – but only if the courts grant a nationwide preliminary injunction in any of these cases, whereby the enforcement of the rule could be paused while the litigation proceeds. This would allow employers to continue using non-compete agreements until a final court decision is reached. However, as it currently stands, the Texas and Florida courts have only issued preliminary injunctions with respect to the plaintiff in each respective case, and not a nationwide injunction. We will not learn the outcome of the Texas decision until August 30, 2024.
Regardless of the outcome, we expect to see numerous lawsuits filed by business owners and employees given the conflicting decisions even if the courts prevent the law from going into effect on September 4. Ultimately, we believe the rule will be reviewed by the U.S. Supreme Court within the next six to twelve months.
What should employers do right now with respect to the pending effective date of the rule?
Employers should immediately review their existing non-compete agreements. Remember that the rule only impacts the actual non-compete rather than the other provisions like non-solicitation or anti-raiding. For existing employment agreements or non-compete agreements that contain a “blue pencil provision,” employers will not need to revise their non-competes and can send out a notice advising the workforce that the company will not be enforcing the non-compete provisions for anyone that is not a senior executive (i.e., workers earning more than $151,164 annually who are in a “policy-making position”) but that the remainder of the agreement will remain in place. A blue pencil provision is a contractual clause which provides that modifying, narrowing, or deleting an unenforceable contractual provision does not render the full agreement unenforceable, i.e. it allows the remainder of the agreement to remain enforceable notwithstanding the null provision.
For existing agreements that do not contain a blue pencil provision, and for new non-competes issued as to prospective hires, please contact OlenderFeldman’s employment practices group to review your particular non-compete terms and conditions on an individualized basis.
OlenderFeldman will continue to provide further updates as they become available.
For more information on compliance, please contact the OlenderFeldman Employment Practices Group here.
