Time to Prepare? FTC Can Enforce Non-compete Ban According to Pennsylvania U.S. District Court

On July 23, 2024, the U.S. District Court for the Eastern District of Pennsylvania refused to enjoin enforcement of the U.S. Federal Trade Commission’s final rule banning most non-competes in the United States.

Our May 2024 alert memo summarizing the final rule is available here. This decision is in direct contradiction to the decision published in early July by the Northern District of Texas, which granted a preliminary injunction preventing the final rule from going into effect for the specific plaintiffs in that case (summary available here). The Texas court is scheduled to issue a final decision on that injunction, including whether it will apply nationwide, no later than August 30.

With uncertainty as to whether the final rule will become effective – with one court saying yes and the other (preliminarily) saying no – and with the final rule’s effective date scheduled for September 4, what should employers do now?

• Employers should begin preparing notices, verifying contact information and determining which workers are considered “senior executives” under the final rule. 
• Employers should also consider, for future hires, what modifications may be needed to offer letters, employment agreements and restrictive covenant agreements.

Prepare Notices and Verify Contact Information

The final rule requires employers to issue a notice to all current and former employees subject to non-competes informing them that their post-termination non-competes are no longer enforceable and that they are free to compete with the employer following their termination of employment. Such notices must be sent by September 4, but should not be sent until it is certain that the final rule will take effect.  Please see our form of notice to employees generally (attached hereto as Appendix A), which is based on the FTC’s safe harbor notice but is updated to clarify that the employer will not enforce any non-compete solely to the extent that it would prevent the individual from competing with the employer in the U.S. following termination of employment.  Prohibitions on competition outside the U.S. are not subject to the final rule and thus remain enforceable (subject to local law).  In addition, non-competes entered into in connection with the sale of a business are carved out from the notice, as they too are carved out from the FTC ban.

Employers should also prepare a list of addresses, emails and cell phone numbers which can be used to send these notices either physically or digitally (via email or text message) to current and former employees affected by the final rule.

Determine the Employer’s Senior Executives

Although not required by the final rule, we recommend that, prior to the distribution of the notices, employers determine which employees are considered senior executives under the final rule. See our May 2024 alert memo for guidance on determining this group.  Non-competes with individuals in this group are grandfathered, such that their non-competes (either currently in existence or entered into prior to September 4) will remain enforceable after September 4.  Once the senior executive group is identified, a different notice (attached hereto as Appendix B) should be sent to them  informing them that their non-compete remains enforceable.

Future Hires

Although revisions to pre-existing arrangements are not required because of the notice requirement, if the final rule takes effect, employers will not be permitted to include non-competes in offer letters, employment agreements or restrictive covenant agreements (or other documents) after September 4.  As a result, employers should review their form documents to prepare for compliance with the final rule (e.g., for new hires, against whom post-termination non-competes will not be enforceable).

Please contact any of the authors or your regular Cleary Gottlieb contacts if you have questions on how to prepare to comply with the final rule and whether there are any useful alternatives for an employer to consider. We will continue to update you as the situation changes.