Preparing for Compliance Crunch as FTC's Noncompete Ban Nears

As we previously reported, on April 23, 2024, the Federal Trade Commission (FTC) adopted a final rule banning post-employment noncompete agreements nationwide, with limited exceptions related to the sale of a business and any “senior executive” noncompetes that were entered into prior to the rule’s effective date.

Most critically for employers, the rule requires them to provide any current or former worker currently bound by a noncompete agreement (other than senior executives) with a written notice that the noncompete agreement is no longer enforceable. This notice must be sent out by the effective date of the rule, which is currently scheduled for September 4, 2024. A model notice provided by the FTC is available here.

However, looming legal challenges could potentially change that timeline. Many employers have delayed distributing notices because of federal lawsuits pending in Texas, Pennsylvania, and Florida seeking to either delay the rule’s effective date and/or vacate the rule entirely. The rule recently survived a legal challenge in Pennsylvania, where the U.S. District Court for the Eastern District of Pennsylvania denied a request for a preliminary injunction and stay of the rule (holding that plaintiffs would likely not succeed on the merits), but in Texas, the U.S. District Court for the Northern District of Texas granted a preliminary injunction staying the rule’s enforcement as to the named plaintiffs in that case (holding that plaintiffs would likely succeed on the merits), while declining to enter a nationwide injunction until the suit is fully adjudicated (expected to conclude at the end of August). The lawsuit in the U.S. District Court for the Middle District of Florida remains pending, and a ruling is expected by the middle of August.

These cases highlight the uncertainty of the rule’s future and the brewing conflict between federal courts throughout the country. However, unless and until a court grants a nationwide injunction (or the FTC otherwise delays the effective date), the rule will go into effect as scheduled on September 4, 2024.

In the interim, employers must start preparing for compliance. The most practical approach is to: (1) identify which workers must be sent notices (by reviewing all post-employment noncompete agreements currently in place, including those found in employment agreements, offer letters, confidentiality agreements, and equity-related agreements); (2) draft the required notices now, which may have to be customized based on the specific noncompete provision at issue; and (3) finalize a distribution plan, but hold off on sending out the notices until there is more clarity on the status of pending legal challenges (which is not expected until late August). While employers can of course send out the required notices any time before the rule’s effective date, it remains unclear whether such notices could be rescinded if the rule is ultimately enjoined (or does not otherwise go into effect).

We will continue to monitor and report on further developments regarding the status of the rule. Please contact a member of Fenwick’s employment group for any questions about the rule, its implications, and how to prepare for compliance.