Attorney
In most of the United States, the default rule for employment is at-will employment, meaning that employees can accept or leave jobs as they choose, and employers can fire and hire whomever they want at their discretion. However, this default rule is subject to exceptions and modifications. For instance, unions often negotiate just cause termination clauses, and for public policy reasons, employers cannot terminate a worker for an illegal and discriminatory reason. Furthermore, employers increasingly use various legal mechanisms to prevent employees from leaving for new opportunities. These mechanisms are called restrictive covenants.
There are several forms of restrictive covenants affecting employees, such as non-solicitation agreements (where employers bar former employees from contacting and poaching its clients, customers, and other employees), non-disclosure agreements (where employers prevent employees from revealing a company’s proprietary information learned during employment), and non-competition agreements. However, restrictive covenants are now facing legal headwinds. The most notable recent challenge is the Federal Trade Commission’s (“FTC”) Final Rule banning noncompetition agreements issued on April 23, 2024. Yet, the Agency’s Rule has sparked intense and ongoing litigation by parties questioning the FTC’s authority to promulgate such a ban. The FTC argues that these agreements hinder competition and should be forbidden to promote free competition in the American business environment.
The Final Rule prohibits employers from entering into, enforcing, or attempting to enforce most noncompete clauses, with exceptions for certain high-level executives making over $151,164 annually and industries such as banking. The Agency requires that employers notify their employees of the changes by September 4, 2024.
Since the Agency’s proposed rule was announced in April, legal challenges have emerged in federal courts in Texas, Pennsylvania, and Florida. Critics argue that in issuing such a broad rule, the FTC has exceeded the powers Congress gave it, the regulation of restrictive covenants falls under the individual states’ jurisdictions, and that noncompetition agreements are essential to protect a company’s human capital investments and trade secrets.
The Texas and Florida federal courts recently issued preliminary injunctions based on the argument that the FTC likely exceeded its authority and lacked Congressional authorization to issue the Rule. However, the Pennsylvania court denied the request for a preliminary injunction, asserting that the FTC’s actions were within its legal powers. Although the FTC’s rules have faced limited injunctions at the trial court level, the courts may ultimately deem the Rule unconstitutional. However, this could take years to resolve as challenges proceed through the court system.
Where does this leave employers and employees? While the Texas Court is scheduled to issue a summary judgment before the Rule’s implementation deadline, there is no guarantee of how the Court will rule and who it will affect. In the meantime, companies and their workforces should work with their attorneys and human resource departments to develop a strategy to address the Rule. Companies should consider strengthening their other restrictive covenants, prepare to inform their staff about ending in-place noncompetition agreements, and prepare for most noncompetition agreements to expire.