The Latest on the FTC’s Non-Compete Rule and What You Need to Know Now
As we have reported previously, the Federal Trade Commission (FTC) is attempting to revolutionize the landscape of non-compete agreements with a sweeping new rule set to take effect on September 4, 2024. This rule, which aims to prohibit most non-compete clauses, has triggered a series of legal battles, resulting in conflicting federal court decisions and creating substantial uncertainty for employers and employees alike.
What’s Going On?
The FTC’s new rule seeks to ban virtually all non-compete agreements, which are contractual terms that prevent workers from seeking or accepting employment with competitors or starting their own businesses in the same industry after leaving a job. The rule also mandates that employers must notify current and former employees that their current non-compete agreements are no longer valid, except for senior executives.
Recent Legal Developments:
Two federal courts have issued conflicting rulings on the FTC’s authority to enforce this rule:
1) Texas Ruling: On July 3, 2024, a Texas federal court issued a preliminary injunction, agreeing with the U.S. Chamber of Commerce that the FTC likely lacked the authority to issue the rule. However, this injunction only applies to the five entities that sued the FTC and does not extend nationwide. See Chamber of Commerce of the United States v. FTC, No. 6:24-cv-00148, 2024 U.S. Dist. LEXIS 81436 (E.D. Tex. May 3, 2024).
2) Pennsylvania Ruling: Conversely, on July 23, 2024, a Pennsylvania federal judge declined to issue a preliminary injunction to block the rule. The judge rejected the employer’s arguments, stating that the FTC has the authority to issue such rules and that the potential harms cited by the employer were speculative. See ATS Tree Servs., LLC v. FTC, No. 24-1743, 2024 U.S. Dist. LEXIS 129398 (E.D. Pa. July 23, 2024).
What’s Next?
All eyes are now on the Texas court, which is expected to issue a final ruling on August 30, 2024. This ruling could lead to a nationwide injunction against the FTC’s rule. A pending challenge in a Florida federal court could also influence the rule’s future.
If neither of these cases results in a nationwide injunction, the next step would be an appeal to the federal courts of appeal. The U.S. Chamber could seek relief from the 5th Circuit Court of Appeals, while the Pennsylvania employer might appeal to the 3rd Circuit Court of Appeals.
What Should You Do? Your 5-Step Plan:
Given the advancing effective date and the ongoing legal uncertainty, Ohio businesses should prepare for the possibility that the rule will take effect. Here are five steps to consider:
1) Develop a personalized strategy. Work with legal counsel to devise a compliance strategy tailored to your business.
2) Use the next three weeks to take stock. Assess your current non-compete agreements and identify which employees qualify as “senior executives,” whose current non-competes will continue to be enforceable.
3) Consider an aggressive alternative. Since the rule states that a company is not in violation if it has a “good faith basis to believe that the rule is inapplicable,” then relying on the Texas court’s decision could provide that defense. That would buy some time for the cases to work their way through the appeals process without eliminating your non-competition agreements.
4) Don’t ignore other restrictive covenants. Review your non-solicitation, non-recruitment, non-servicing, and non-disclosure clauses for compliance with the rule.
5) Get your trade secrets house in order. Identify your trade secrets and ensure that you have proper policies and procedures in place to protect them.
In conclusion, the FTC’s rule to ban non-compete agreements represents a significant shift in employment law, with far-reaching implications for Ohio residents and businesses. While the legal landscape remains uncertain, staying informed and prepared for potential changes is crucial. Monitor the developments closely, consult with our Meyers Roman employment lawyers, and take proactive steps to ensure compliance and protect your business interests.
Disclaimer: Please note that this Legal Update and the information contained herein do not, and are not intended to, constitute legal advice or legal representation or create (and is not a solicitation to create) an attorney-client relationship; instead, all of the information, content, and materials contained in this publication are for general informational purposes only and may not reflect current legal developments. You should not act upon any such information, content or materials contained in this publication without first seeking qualified legal counsel.