On April 23, 2024, the Federal Trade Commission voted 3-2 to approve a final rule banning all employee noncompetition agreements nationwide. The rule, currently set to go into effect 120 days after publication in the Federal Register (except for the notice provision which is effective earlier), is the result of the FTC’s position that these agreements are unfair methods of competition in violation of Section 5 of the FTC Act. Not only does the rule have an impact on an employer’s ability to enter into these agreements with future employees, though—it also affects existing noncompete agreements employers have with current and past employees.
Under the rule, employers must contact current (and past employees with last known contact information on file) who entered into noncompetition agreements prior to or during their employment and that are still in effect to inform these employees that the noncompetition agreements would not be enforced. The notification must be made within August 21, 2024.
The rule expressly applies to noncompetition agreements rather than other forms of restrictive covenants. In fact, the FTC states that well-drafted confidentiality, non-disclosure, and non-solicitation agreements may even work to achieve the same purpose as noncompetition agreements, without unfairly affecting competition. The FTC was also quick to add, however, that, under certain circumstances, non-solicitation clauses (and other employee agreements, such as employee repayment agreements or non-disclosure agreements) could qualify as noncompete clauses subject to the ban. While the FTC refused to categorically determine whether these other employee agreements fall under the rule, it did provide a factually intensive “functions to prevent” test. In essence, if an employee agreement not classified as a noncompetition agreement nevertheless “functions to prevent” competition with the employer following an employee’s separation from employment, it also falls within the scope of the rule.
The rule has exceptions for preexisting agreements with senior executives, agreements entered into in connection with the sale of a business, existing causes of action and where the employer has a good faith basis that the rule does not apply.
Expected legal challenges to the rule cropped up almost immediately, with tax services giant Ryan, LLC filing a Complaint in the Northern District of Texas, Dallas Division shortly after the FTC vote. Ryan, LLC v. Federal Trade Commission, 3:24-cv-00986 (N.D. Tex. Apr. 24, 2024). A statement released by the United States Chamber of Commerce called the FTC’s act a “blatant power grab that will undermine American businesses’ ability to remain competitive” prior to filing its own lawsuit in the Eastern District of Texas, Tyler Division. U.S. Chamber to Sue FTC Over Unlawful Power Grab on Noncompete Agreements Ban | U.S. Chamber of Commerce (uschamber.com); Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce v. Federal Trade Commission and Lina Khan, 6:24-cv-00148 (E.D. Tex. Apr. 24, 2024).
So, what does this mean for Texas employers? While the current and anticipated legal challenges will likely delay (and, if successful, prevent) the rule from going into effect) employers should be mindful of any noncompetition agreements they have with past and current employ and former employees who are still within the term of their noncompetition restrictions.
An employer should also have legal counsel review other employee agreements that might otherwise restrict an employee’s ability to freely compete with it following their separation of employment, including but not limited to, non=solicitation agreements, NDAs, and employee repayment agreements and consider whether revisions might be needed to comply with rule after its effective date.
Finally, employers should consult with legal counsel and follow the status of the litigation challenging the rule to determine whether they need to send “clear and conspicuous” written notice to employees about the enforceability of those agreements by or before August 21, 2024.
Resources
FTC Final Rule with Commentary