Mark Pestronk
Q: In your May 20 Legal Briefs column ("Noncompetes are about to become illegal"), you noted that the Federal Trade Commission's new rule prohibiting employee and independent contractor noncompete clauses is scheduled to take effect on Sept. 4. You also noted that there was a good chance that a court would overturn the rule before it takes effect. Has that happened, or will the rule go into effect in about 10 days? If it does, will it retroactively apply to noncompetes that were signed before that date? Also, my business is a franchisee of a travel franchisor, and I have a noncompete. Will the new rule make my noncompete unenforceable?
A: Quite a bit has been happening since May 20, but no one knows for sure whether the new rule will go into effect on Sept. 4. Even if it does go into effect, no one knows for sure how long it will stay in place.
A Texas federal judge has temporarily stopped the FTC from enforcing the rule, but only against the plaintiffs in that case. The judge plans to issue a final decision by Aug. 30, and the ruling may still be limited to the plaintiffs, or it may take effect nationwide.
Either way, the government is certain to appeal the ruling, but the appeal would go to the most conservative federal appeals court in the nation, so it is possible that the FTC rule will go into effect on Sept. 4 but then be struck down some months later. If Donald Trump wins the election, he is certain to replace the activist chair of the FTC, and his replacement will probably try to repeal the rule.
If the case ends up in the Supreme Court, the prospects for the rule are dim, especially after the court's June 2024 decision holding that courts no longer have to defer to the expertise of administrative agencies like the FTC.
If the rule does take effect, it will apply retroactively. This means that noncompetes (as well as nonsolicit covenants and the like that have the "same functional effect" as a noncompete) that were entered into in the past will no longer be enforceable.
So if your agency employs travel advisors or hosts ICs, and if you have a noncompete or nonsolicit covenant in your agreement, my advice is to make sure that your agreement also contains extensive prohibitions on disclosure or use of trade secrets, as those prohibitions won't be subject to the rule. If your noncompete becomes unenforceable, you will still be able to enforce the trade secrets clauses.
If you are a franchisee and your franchise agreement prohibits you from competing with the franchisor, you should know that the FTC expressly excluded franchise agreements from the rule. In other words, noncompetes in franchise agreements will remain enforceable against the franchisee.
However, if your franchise agreement is in the name of your corporation or limited liability company, the exception for franchises will not apply to you personally as an employee of the franchisee.