By Wm. Joseph Austin, Jr.
Of Counsel, Narron Wenzel, P.A.

The Federal Trade Commission (FTC) has issued a rule that would bar enforcement of most noncompetition covenants nationwide.  The rule is scheduled to go into effect September 4, 2024.  Published in April of this year, the rule sounded like the death knell for noncompetes. 

However, the FTC’s authority to take this action is being contested in the courts.  A federal judge in Texas has delayed the effective date of the rule for the parties in one lawsuit.  However, a federal judge in Pennsylvania rejected a similar plea made in another case.  That decision affirmed the FTC’s authority to ban noncompetes.

While we would like to make a prediction, paraphrasing Mark Twain, “The report of [the death of noncompetes] was an exaggeration,” the decision of the court in Pennsylvania teaches us that it is too soon to tell.  The fate of the noncompetition covenant is on the operating table.   

So we have time and space to take a closer look at the new rule and sketch out some contingency plans.  The rule states that it is a violation of the Federal Trade Commission Act for employers to enter into noncompetes with “workers” (broadly defined as employees, independent contractors, interns, etc.) after the effective date.  In other words, at the present time, and presumptively until September 4, 2024, the FTC rule has no effect on existing noncompetes nor on the parties’ rights to enter into a noncompete.  When the rule does go into effect, the employer must give written notice to workers who were subject to noncompetes up to that point in time that the noncompete is no longer enforceable.

That is the FTC rule in a nutshell.  There is one major exception to the rule.  It does not apply to “Senior Executives,” a term that is defined as policy-making officers of the employer who are paid $151,164 per year.  Noncompetes with this class of employees that were in effect as of the effective date of the rule will remain in force. After the effective date employers will be prohibited from entering into new noncompetes with even “Senior Executives.”

Another exception carved out of the rule is for noncompetes that are violated prior to the effective date.  Thus, an employee who makes off with your equivalent to the Pepsi formula and sets up a competing business across the street in violation of a noncompete prior to the effective date can still be held to account in a lawsuit.  The cause of action is said to have accrued prior to the effective date of the rule, which will not impair the employer’s right to seek remedy and relief.

Nor will the rule affect nonsolicitation agreements or nondisclosure agreements in most cases.  Therefore, it will still be possible to contractually protect proprietary information and existing customers.  The former employee can stand toe-to-toe with the former employer and compete for new business, but well-crafted restrictive covenants such as nondisclosure agreements and nonsolicitation covenants will prevent him from walking away with the customer list and the Pepsi formula even after the effective date of the rule.

What we have done here is to provide a tip-of-the-iceberg synopsis of hundreds of pages of text published by the FTC about its new rule.  If you have questions or if you would like to stay informed about the lawsuit that could make or break the rule, contact Joe Austin at jaustin@narronwenzel.com or call him at 252-229-1522.