April 2024 Business Litigation Update

As has been widely reported, the FTC voted on Tuesday to essentially ban all non-compete agreements that employers impose on workers. The Effective Date of the Rule will be late August 2024.

Because many companies use non-competes in their employment agreements, the impact of the Rule on employee hiring and retention, as well as business competition, cannot be overstated.

We are still studying the Rule but here are some initial takeaways:

• Subject to limited exceptions, the Rule makes it an unfair method of competition to impose a non-compete on a worker or to attempt to enforce a non-compete.
• Employers are required to provide notice to their employees that non-compete agreements existing as of the Effective Date will not be enforced.
• The Rule seeks to preempt and supersede any inconsistent state law, regulation, or order.
• The Rule does not extend to non-competes with “senior executives” entered before the Effective Date. Senior executives are defined as workers earning more than $151,164 who are in a “policy-making position.” A “policy-making position” is a company’s officer with “final authority to make policy decisions that control significant aspects of a business entity or a common enterprise.” The FTC estimates that less than 1% of workers are “senior executives.”
• On and after the Effective Date, non-competes, even with “senior executives,” are prohibited.
• The Rule does not apply to (1) non-competes entered in connection with the sale of a business; (2) a cause of action related to a non-compete that accrued prior to the Effective Date; and (3) if an employer has a “good-faith basis” to believe that the Rule is not applicable to the non-compete. Commentators anticipate that the “good-faith basis” exception, in particular, will be the subject of significant litigation.

The U.S. Chamber of Commerce has already filed a lawsuit challenging the Rule. If the Rule is enjoined — which is likely — it will be tied up in litigation for years. We strongly suspect that this Rule will get enjoined before the Effective Date.

We will be watching for more developments as the U.S. Chamber of Commerce litigation moves forward and the FTC responds.