On January 9, 2024, shareholders in our Restrictive Covenant and Trade Secret Practice Group conducted a webinar covering “What Employers Need to Know About Non-Competes in 2024.” A recording of that webinar is available here. Below, the team addresses some of the additional questions concerning the status of the FTC Proposed Rule, anticipated challenges to the Proposed Rule, FTC Lawsuits Against Employers for Imposing Non-Competes, Exceptions to Non-Compete Bans, Employee “Theft,” and Hiring Employees Subject to Non-Competes that were posed during the webinar.

1. The Status of the FTC Proposed Rule Banning Non-Competes

The comment period ended on April 19, 2023, and we are now waiting on the FTC to issue a Final Rule. There is no deadline for the FTC to issue a Final Rule, though the general consensus is that the FTC will issue a Final Rule in April 2024. No one knows with certainty what the Final Rule will say, and the FTC is not restricted by the proposed rule or comments. It can adopt the proposed rule as is, modify, or even implement an entirely different rule without any additional rulemaking process. The FTC’s advocacy for a full ban since the comment period closed suggests it does not intend to change course, and employers would be wise to prepare for a Final Rule substantially similar to the proposed one.

2. Anticipated Challenges to the FTC Final Rule

Regardless of what the Final Rule looks like, it will be immediately challenged in court (similar to the vaccine mandate challenges), with the Final Rule taking effect unless and until it is enjoined. The prevailing opinion is that there are very strong arguments to attack the FTC’s authority to issue the rule, primarily that the FTC exceeded its rule-making authority. Regardless of the ultimate success of the legal challenges, it will still generate uncertainty in the interim and give rise to public policy arguments against enforcement in current disputes (which some judges may find persuasive). Moreover, the rulemaking effort is merely another example of growing hostility towards non-compete covenants, and we will likely see Congress and states, including New York, revisit this issue.

3. FTC Lawsuits Against Employers for Imposing Non-Competes

During 2023, even without the authority of a Final Rule, the FTC filed three complaints against employers over their use of non-competes. The claims alleged the employers imposed non-competes on employees in an unfair manner that tended to harm competition, consumers, and workers, thus violating antitrust laws. The Complaints were unrelated to any enforcement efforts by the employers at issue, but the FTC argued that the noncompetition agreements at issue had the effect of prohibiting workers in the affected industries from earning higher wages and were therefore unfair labor practices. This ties into the cooperation agreements entered into between the FTC, the NLRA and DOL in 2023, which make it more likely that employers’ non-competes may come under scrutiny as a result of an unrelated audit or investigation.

4. Exceptions to Non-Compete Bans in the Proposed Final Rule

The FTC Proposed Rule is very broad and applies to all kinds of paid and unpaid workers, while some state laws are more narrow (bans for employees only) or are less clear in whether they are intended to apply to other categories of workers beyond employees. Similarly, the FTC Proposed Rule did not contain a carve out for highly compensated workers. Other state laws, like Illinois, Colorado, Maryland, Maine, Nevada, Oregon, Rhode Island, Virginia, Washington and Washington D.C., allow for non-competes if an employee makes above a certain salary threshold. It is best practice to evaluate each case based on its facts and review the applicable law, since there is no one-size-fits-all approach to non-compete guidance at this time.

5. Employee “Theft”

Most of the laws voiding non-competes do not impact the enforceability of non-solicitation clauses, though some do (e.g., Colorado and Illinois). However, with the federal government’s recent focus on antitrust, non-solicitation clauses purporting to prohibit the hiring of employees by a competitor or business partner may come under closer scrutiny. Employers should be wary of any agreement that could be interpreted as restricting the ability to hire employees.

6. Hiring Employees Subject to Non-Competes

Even with the changes in the law, hiring employees subject to non-competes can still be risky. Generally, non-competes are not per se invalid, and lawsuits to enforce non-competes can be made even if the covenant in question is likely to ultimately be found overbroad or unenforceable. Unfortunately, the path to proving a non-compete is unenforceable in court, and arbitration is disruptive, time-consuming and expensive.