The Advisors' Blog

Late last week, a federal district court in Florida ruled against the non-compete ban that the Federal Trade Commission adopted earlier this year, which is scheduled to go into effect on September 4th. The decision follows two other district court decisions – one from Texas that barred enforcement of the rule and one from Pennsylvania that said the FTC had acted within its authority. This Faegre Drinker memo summarizes the case and gives a recap of where we stand:

– In Properties of the Villages, Inc. v. Federal Trade Commission, U.S. District Court Judge Timothy Corrigan enjoined the FTC from implementing or enforcing the Noncompete Rule against the plaintiff, and was careful to note that he was granting an injunction against the FTC only for the plaintiff, and was not entering a nationwide stay of the Noncompete Rule.

– As such, all eyes remain on the Northern District of Texas, where the Ryan court has promised a final decision on or before August 30 as to whether it will issue a permanent injunction and a nationwide stay of the Noncompete Rule.

Without clear guidance one way or the other, it’s a good idea to consider whether your existing non-competes will operate the way you expect them to if the ban does go into effect. This FW Cook blog points out that if that happens, the FTC rule could render unenforceable non-compete forfeiture provisions that are contained in senior executive equity award agreements entered into after September 4th. Here’s an excerpt:

For example, we often see equity arrangements where certain types of terminations, for example, a qualifying retirement, result in favorable vesting, but the equity payout is delayed until the normal payout date. For example, the employer may issue performance share units with a three-year performance period. If the executive has a qualifying retirement during the performance period, he or she will be entitled to payout at the end of three years, based on the degree to which the performance metrics have been satisfied over the three-year period. In these situations, it is not uncommon for the employer to require the executive to refrain from competition during the performance period and/or the remainder of the normal vesting period in order to receive the payout.

Here’s the issue. Will a forfeiture-for-competition provision be valid if the award agreement is issued after September 4? This may depend on which document contains the noncompete provision. In particular, an arrangement we have often encountered is where the noncompete provision for each year’s award is embodied in that year’s award agreement. So, the 2023 award agreement contains a noncompete provision with post-employment vesting for that year’s award (and a corresponding forfeiture provision for competition), the 2024 award has similar provisions pertaining to the shares subject to that award, etc.

The blog says that if you act quickly, there may be a way to get a valid non-competition commitment that applies to future awards issued to current executives:

Assuming an employer faces this particular issue, there may be ways to solve the problem, so long as the appropriate arrangements are in place before September 5. For example, subject to state contract law requirements pertaining to sufficiency of consideration, one approach would be for the employer and the executive to agree today that, in consideration for the potential issuance of future equity awards, the executive agrees that such awards will be subject to a provision that any shares that would otherwise be delivered post-employment will not be delivered if the executive competes during the post-employment period.

As always, your mileage may vary – so it’s important to consult your own legal advisors about your specific scenario. Because September is rapidly approaching and invalidation of the rule remains uncertain, there is not much time to waste.

– Liz Dunshee