Practical Considerations for Employers in Light of Texas Ruling on FTC Non-compete Ban

The Federal Trade Commission's (FTC) rule banning non-competes is scheduled to go into effect on Sept. 4, 2024. Although practitioners have been anticipating a nationwide preliminary injunction to derail the ban, federal courts to date have only temporarily enjoined the FTC from enforcing the rule against Ryan LLC, a global tax services and software provider. The judge in Ryan LLC v Federal Trade Commission has refused to extend the scope of the preliminary injunction beyond applicability to Ryan. 

While this ruling in the U.S. District Court for the Northern District of Texas is a key signal to employers that the FTC rule is not likely to withstand judicial scrutiny on constitutional grounds, employers should not be lulled into inertia around assessing their next steps in anticipation of the rule going into effect in less than two months. The judge in Ryan LLC has indicated she will release her final ruling by Aug. 30, which is mere days from the rule's scheduled effective date. 

The best approach for employers would be to operate as if the rule will go into effect on Sept. 4 and the top priority is immediate compliance.

Senior management and human resources teams should consider 1) working with counsel to review the terms of outstanding non-competes, 2) assess how best to utilize the ability to grandfather preexisting non-competes with senior executives, 3) develop a strategy for distributing notices to current and former employees stating their non-competes are no longer enforceable, and 4) identify other avenues to mitigate the potential damage competing employees could cause the company.

Employers should consider carefully reviewing the non-compete provisions their current and former employees are party to and classifying the employees based on whether they are able to qualify as senior executives for purposes of grandfathering certain non-competes. This audit should not be limited to employment agreements and separation agreements, but include equity award agreements, retention bonus letters and severance plans. 

Employers considering entering into new non-competes with their senior executives prior to the scheduled effective date should weigh the costs to implement versus the enforceability of the non-competes. In order to be enforceable, any new non-competes will require additional new consideration in exchange for the executives' entry and continued compliance. Senior management and compensation committees may need to evaluate what form of consideration is appropriate and how the additional incentive fits within each executive’s compensation package. Bonuses or future eligibility for discretionary bonus or severance plans are just two types of consideration that may constitute valid consideration. 

The FTC’s rule includes model language for notifying current and former employees that their non-competes are no longer enforceable. Employers should be developing notices that align with their business goals and making plans to efficiently deliver compliant notices to affected employees. This process should include assessing the pool of equity award recipients with non-compete provisions in their award terms and the mechanics of timely large-scale notice distribution. 

Employers should also be reviewing the terms of their restrictive covenants to identify ways in which confidentiality, trade secret and non-solicitation provisions can provide adequate protection against departing employees. 

Notwithstanding the practical considerations for developing a plan of action for compliance, employers can still reasonably anticipate a protracted uphill battle for the FTC to successfully implement this rule in its entirety. There are a number of other challenges in other jurisdictions and a court could still issue a broader nationwide injunction or vacate the rule in its entirety prior to the scheduled effective date.