News

"The final rule already faces multiple legal challenges which may delay the final rule's effective date or invalidate it entirely.... Despite the uncertainty ... employers should consider taking steps to identify current noncompetes, individuals who would need to receive notice, and post-employment restrictions for senior executives that may need to be shored up in the event that the rule takes effect on September 4."

"The U.S. Chamber of Commerce and other entities have already filed federal court lawsuits seeking an emergency injunction against the regulations. There is reason to believe that these efforts will be successful ... To the extent employers believe noncompetes constitute a valuable business practice designed to protect company trade secrets and confidential information as well as the valuable goodwill that exists between employers and their customers, noncompetes remain legal and enforceable, subject to the various state laws limiting them."

"Given the legal challenges to the FTC's rule, employers should know New York City's recent proposed challenge to using noncompete agreements, Bill 140 , is more onerous to employers than the FTC rule.... If passed, Bill 140 will be retroactive and require employers to affirmatively 'rescind' any noncompete by the date the law goes into effect."

"[T]he presiding judge ... issued a series of Orders that require all briefing on the request to stay/enjoin the FTC Rule to be completed by June 12. The Court will then announce by June 13 whether it will make a decision based on the parties' briefing or conduct a hearing, which would take place on June 17.... [T]he Court has committed to issuing a decision by no later than July 3 on the request to stay/enjoin the FTC Rule from going into effect." [Ryan v. FTC, No. 24-0986 (N.D. Tex. complaint filed Apr. 23, 2024)]

"Though the FTC argues [that] the agency charged with regulating 'competition' can regulate 'non-competition' agreements, the legal challenge will be more complicated. The Commission will be pressed to defend the lack of specific delegation of authority under Section 5 of the FTC Act by Congress to regulate contracts historically governed by state law. Indeed, two of the commissioners voted against adopting the final rule for this reason."

"Within 24 hours of the FTC voting to approve the Final Rule, several entities ... filed lawsuits against the FTC in the Federal Court seeking injunctions to postpone the Effective Date and to invalidate the Final Rule. Additional lawsuits have been filed, and are anticipated to be filed, by other interested parties."

"The Final Rule goes beyond prohibiting straightforward noncompete clauses. It also prohibits functional noncompetes, which are arrangements that serve to restrict, 'penalize,' or 'function to prevent' a worker from working after their current employment terminates. In the preamble to the Final Rule, the FTC indicates that inclusion of the term 'penalize' is meant to prohibit clauses that 'require a worker to pay a penalty for seeking or accepting other work or starting a business after their employment ends.' "

"[E]mployers should take the following steps: [1] Determine which existing non-competes are with Senior Executives.... [2] With regard to Senior Executives that are not currently subject to non-competes, consider strategies for entering into non-competes with these individuals, if otherwise permissible under state or local law, before the Final Rule becomes effective. [3] Tax Exempt Entities should evaluate whether they fall within the FTC's jurisdiction, in which case the non-compete ban requirements will apply to them."

"Employers should not stop using noncompetes, at least if and until the Rule actually becomes effective.  ... If the Rule is not enjoined a month before the effective date, employers should: ... [1] Implement stronger NDAs and non-solicitations with workers with noncompetes. [2] Try to limit sharing of confidential information and building of relationships with the least number of people. [3] For people that the company feels a noncompete is essential, consider having an 'interim period' where the worker promises to stay a worker for a few hours a week (likely remotely and just doing transitional duties) upon notice of resignation or termination for a period of time (and during the period of time, you can have a noncompete)."

"Not-for-profits should perform a careful analysis to determine if they are subject to the final rule or if any of their businesses are subject to the final rule before any notices are sent to employees.... [E]mployers concerned with protecting their confidential and proprietary information should not only eliminate non-competes from their employment agreements but also carefully review and revise non-solicit, non-disclosure, and other restrictive covenants to ensure that they are narrowly tailored to protecting the employer's confidential and proprietary information."

"[T]he legal challenges assert that the Noncompete Rule upends centuries of established contract law as noncompetes have been enforceable contracts since before the Nation's founding. Indeed, enforcement of non-competes has been a feature of English common law since the early 18th century ... This raises the question of whether the purported benefit of the Noncompete Rule to workers and the economy as a whole touted by the Agency outweighs the costs to employers who have long relied on the expectation of enforceable noncompetes to protect their specialized training, investment, and confidential information ... Ultimately, [the authors] believe ... that the FTC's Noncompete Rule is unlikely to be upheld in its current form."

"A change from the proposed rule is that there is an exception for existing Noncompetes with 'senior executives'. A senior executive is an individual earning more than $151,164 in the preceding year who is in a 'policy-making position'.... This narrow definition excludes many highly paid employees such as sales and investment professionals or executives without policy-making authority."

"[1] Determine which of your workers have agreed to non-compete clauses. This may include former workers, and may include 'Senior Executives.' [2] Consider whether your existing agreements will be enforceable under applicable state laws that are not preempted by the FTC rule.... [3] [S]tart thinking about the logistics of notifying your workers about unenforceable non-competes. [4] If your business relies on trade secrets or other confidential information ... consider taking additional steps to protect your most valuable information from being misappropriated by departing workers ... [5] Develop a system to keep track of any restrictive covenants you use moving forward."

"The Chamber alleges in its complaint that 'the economy as a whole will suffer' because dominant firms snatch the best employees from startups and small businesses. The Chamber argues that the FTC's Rule is an assertion of power that is contrary to centuries of state and federal law and relies on 'novel claims of authority.' " [Chamber of Commerce of the U.S.A. v. Federal Trade Commission, No. 24-00148 (E.D. Tex. complaint filed Apr. 23, 2024)

"To date, three lawsuits have been filed challenging the legality of the FTC's Final Rule banning non-competes. The initial two cases were filed in Texas federal court, which is widely viewed as a more hospitable forum for attacks on the Rule. The third case was filed in Pennsylvania federal court, possibly for the strategic purpose of creating a circuit split to enhance appellate options.... While other lawsuits against the FTC and its commissioners trickle in, it's likely the U.S. Chamber's lawsuit will take the lead."

"Employers who rely on noncompete agreements to protect their legitimate business interests will no doubt face questions from employees concerning the continued enforceability of those restrictions following the FTC's promulgated rule  ... [This article provides] Q&A talking points for employers to address employee questions.... [E]mployers should evaluate alternative protective measures and utilize a 'belt and suspenders' approach to the protection of their interests."

"Employers should start identifying the workers who may need to receive notice if the Rule goes into effect and consider the logistics of making notice.... [E]xisting non-competes with senior executives will remain enforceable after the Rule goes into effect.... Employers should ... evaluate less restrictive measures that they either now have available or may need to implement should the Rule go into effect.... [E]ven if the Rule is delayed or struck down by the United States Supreme Court, state legislatures or Congress may be prompted to adopt restrictions on non-competes."

"[N]on-compete clauses can be found in a variety of compensation arrangements, including employment agreements, severance plans, and incentive awards.... [T]he final rule largely preserves the proposed rule's sweeping scope, while incorporating a narrow legacy exception for existing non-compete clauses with senior executives. Assuming it survives court challenges, the rule will transform employee compensation arrangements in the United States, forcing many employers to rethink how they incentivize, retain, and part ways with their employees."

"Although three lawsuits have been filed so far, the lawsuit to watch is the United States Chamber of Commerce lawsuit filed in the United States District Court for the District of Texas.... [C] ompanies should know in June whether the Rule will be enacted (and thereby require companies to come into compliance within 120 days of the Rule being published in the Federal Register) or enjoined. " [Chamber of Commerce of the United States of America v. Federal Trade Commission, No. 24-00148 (E.D. Tex. complaint filed Apr 23, 2024)]

"[A recent[ prosecution and settlement makes it clear that the NLRB is serious about enforcing McLaren Macomb  ... Employers should review their standard settlement and severance agreements ... and decide whether revisions to their standard agreements is appropriate. Employers should also consider whether it makes sense to notify former employees who signed agreements with provisions in violation of McLaren Macomb that these provisions will not be enforced." [ McLaren Macomb , 372 NLRB No. 58 (Feb. 21, 2023)]

"The recent Complaint filed for severance benefits against Elon Musk, X Corp., et.al., serves as a reminder that it is as important to clearly establish the fiduciary governance structure over severance plans subject to [ERISA], as it is for other ERISA-governed plans, and to administer such plans in compliance with ERISA, the plan processes and procedures. This case highlights some interesting considerations for plan sponsors and administrators of ERISA severance plans." [Agrawal v. Musk, No. 24-1304 (N.D. Calif. complaint filed Mar. 4, 2024)]

"According to the lawsuit, Musk 'has a special ire toward' the company's former execs and has 'vowed a lifetime of revenge' against them.... The Plaintiffs lawyer argues that they were still protected by [ERISA] and that his 'scheme… was a pointless effort that would not withstand legal scrutiny.' " [Agrawal v. Musk, No. 24-1304 (N.D. Calif. complaint filed Mar. 4, 2024)]

"The multi-million dollar ruling stems from a 2018 WARN-covered 'plant closing' and follows an earlier award on November 23, 2021 of $1.39 million to certain class members for damages including back pay and interest owed pursuant to the WARN Act for the same notice violation underlying the recent ruling." [ Messer v. Bristol Compressors Int'l, LLC , No. 18-0040 (W.D. Va. Jan. 16, 2024)]

"ISS will vote on a case-by-case basis on shareholder proposals requiring that executive severance (including change-in-control related) arrangements or payments be submitted for shareholder ratification."

"A recent district court case highlights the importance of following the terms of the plan document in making determinations on benefit claims.... After reviewing minutes from the committee meeting at which the claim was decided, the court found the committee’s decision was based on an immaterial point and not the proper standards outlined by the terms of the plan." [ Franke v. Fifth Amended & Restated Newfield Exploration Company Change of Control Severance Plan , No. 21-2234 (D. Colo. Oct. 20, 2023)]