Key Takeaways | FTC’s Final Noncompete Rule: Developing Your Game Plan

During this webinar on June 18, 2024, Andrew Liazos, Brian Mead and Heidi Steele discussed what employers should consider in the evolving landscape of noncompete agreements. With the Federal Trade Commission’s (FTC) final rule (the Rule) that would ban noncompetes nationwide set to go into effect on September 4, 2024 (assuming pending litigation doesn’t cause any delays), employers will want to develop a game plan to navigate these issues both in the short and long term. The speakers addressed the legal-, practical employment- and executive compensation-related issues legal and human resources teams should consider if the FTC ban is upheld in full or in large part.

Top takeaways included:

1. Identify All Existing Contracts with Noncompete Provisions. The Rule requires that employers provide a notice to service providers (other than “senior executives”) who are parties to a noncompete agreement that will be prohibited by the Rule. Employers will want to identify this population and draft a compliant notice.
2. Analyze if Existing Noncompete Provisions with “Senior Executives” Should Be Amended Prior to September 4, 2024. The Rule contains an exception to the ban for senior executives subject to a noncompete agreement. For purposes of the Rule, a “senior executive” is in a “policy-making position” and earned at least $151,164 in the preceding year (or the equivalent when annualized for partial years). Companies should also consider if these provisions should be amended to strengthen the provisions and/or to enhance their enforceability under applicable state law.
3. For Public Companies, a “Senior Executive” Under the FTC Definition May Not Include All Identified Executive Officers. The FTC intentionally narrowed the scope of the definition of “Senior Executive” when compared to the SEC’s definition of “Executive Officer.” In addition, any changes to noncompetes for the principal executive officer, principal financial officer or a named executive officer prior to the effective time of the Rule will likely trigger an Item 5.02 8-K filing. The Rule could also affect how companies analyze golden parachute payments under Internal Revenue Code Section 280G. Public companies will want to review their proxy disclosures on employment arrangements to ensure the noncompete provisions are summarized correctly once the Rule is in effect.
4. Don’t Forget Local Trends. While we expect to learn more about the challenges to the Rule over the summer, employers should be aware that there have been many recent state law changes governing the enforceability of noncompete restrictions, and the area continues to develop. Companies will want to stay up to date on the rules in their jurisdiction. Additionally, we have seen a trend of courts unwilling to rewrite or “blue pencil” noncompliant arrangements, including in Delaware.
5. Think About Equity Awards. Employers will also want to understand which of their equity grants contain noncompete provisions. If the FTC Rule goes into effect, it will have an impact on awards where vesting is tied to compliance with the noncompetes.
6. Explore Alternatives. We expect employers will start exploring other strategies in the coming months, including nonsolicitation agreements, equity awards with longer vesting periods, fixed-term employment contracts, sign-on bonus repayments and even garden leave arrangements.

For any questions regarding the Rule, please contact your regular McDermott lawyer or one of the webinar’s speakers.