Road for new ban on noncompetes will be bumpy 

AMARILLO, Texas – There’s a good chance the Federal Trade Commission’s ban on noncompetes will be “temporarily enjoined,” but employers should still begin reviewing these agreements with employees and preparing to make notifications required under the final rule, says Allison Davis of Brown & Fortunato. 

The FTC announced in April that it had issued a final rule to ban noncompetes nationwide in a move that the agency says will protect the fundamental freedom of workers to change jobs, will increase innovation and will foster new business formation. 

“It is likely that the rule will be temporarily enjoined pending a decision about its validity by the Supreme Court of the United States,” said Davis, chairperson of Employment Group at B&F in Amarillo, Texas, in May. “To date, however, there has not been an injunction issued.” 

The rule is set to take effect Sept. 4, 2024, 120 days after it was published in the Federal Register. 

But the rule has been challenged from the get-go. Ryan LLC, a global tax services and software provider, challenged the rule before a judge in the Northern District of Texas the day it was issued. Ultimately, the U.S. Chamber of Commerce, representing numerous business groups, intervened in the lawsuit and has, essentially, consolidated matters into one lawsuit against the FTC, Davis says. 

Even if the rule is enacted, it will likely be mired in litigation. At issue: The rule does not specifically carve out non-solicitation clauses, if such classes effectively prohibit the worker from seeking or accepting employment or operating a business after the conclusion of the worker’s employment, leading to questions about whether non-solicitation and/or confidentiality clauses are prohibited, Davis says. 

“It is likely that the validity of non-solicitation and confidentiality clauses under the rule will be analyzed on a case-by-case basis,” she said. 

Also at issue, Davis says: The rule retroactively invalidates all noncompetes, except those with “senior executives” who 1) were in a policy-making position at the time of signing the noncomplete and the time of enforcement; and 2) received total annual compensation of at least $151,164 in the preceding year. A “policy-making position” means a business entity’s “president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity.” 

“We anticipate there will be litigation over whether a worker is in a ‘policy-making position,’” she said.  

If the rule goes into effect, Davis says companies with existing noncompete provisions or agreements “must provide clear and conspicuous notice to the worker…that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” This notification must 1) identify the company that entered into the non-compete with the worker; and 2) be “paper delivered by hand to the worker, by mail at the worker’s last known personal street address, by email at an email address belonging to the worker…or by text message at a mobile telephone number belonging to the worker.”