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Life After the FTC Non-Compete Ban: What Companies Should Know

 |  May 20, 2024

By: Anna Aryankalayil, Eileen M. Cole, Andrew Cook, Mike Delikat, Craig Falls, James McQuade & Amy W. Wray (Orrick)

September 4 Effective Date

The FTC’s final rule on non-compete agreements was published in the Federal Register on May 7, 2024, setting the rule to take effect on September 4, 2024, unless delayed by pending litigation.

Court Decision to Stay Effective Date Expected by July 3

On May 3, 2024, the United States District Court for the Eastern District of Texas paused the Chamber of Commerce’s lawsuit against the FTC’s rule in favor of an earlier lawsuit filed by Ryan LLC. The Chamber of Commerce was allowed to join the Ryan LLC lawsuit. On May 7, 2024, the United States District Court for the Northern District of Texas stated it would decide by July 3, 2024, on the motion to stay the rule’s effective date. Therefore, a decision on whether the rule’s effective date will be stayed is expected by July 3, 2024, about two months before the September 4 effective date.

Next Steps for Employers

Employers should keep an eye on the Ryan LLC litigation for the court’s ruling on the motion for a stay of the rule’s effective date and preliminary injunction. Employers need to assess the time required to identify which employees need to receive the notices mandated by the rule and to distribute those notices. According to the rule, employers must notify employees with affected non-compete clauses that these clauses will not be enforceable by the effective date.

If employers believe they can prepare and issue the necessary notices within approximately two months, they may wait for the court’s decision. However, if employers think two months will not be enough time, they should begin the assessment process now.

Background on the FTC’s Rule

In a groundbreaking move, the FTC determined that non-compete agreements between employers and workers are an “unfair method of competition” under the FTC Act. The final rule:

  • Bans virtually all new non-compete agreements after the effective date.
  • Renders unenforceable all existing non-compete agreements with employees who do not qualify as “senior executives.”
  • Requires employers to notify affected employees of the change before the effective date.

This controversial rule, passed by a 3-2 vote, faced immediate legal challenges. The U.S. Chamber of Commerce and others argue that the rule violates the Administrative Procedure Act, asserting that the FTC lacks the statutory authority for such substantive rulemaking. They also claim that any delegation of authority from Congress to the FTC violates the U.S. Constitution and that the rule is arbitrary and capricious.

Unless a court stays it, the rule will take effect 120 days after its publication in the Federal Register. Here’s what companies need to know: