By Ryan M. Gilchrist and Meghan A. Douris

Seyfarth Synopsis: On June 28th, the Supreme Court issued its opinion in Loper Bright Enterprises v. Raimondo, No. 22-451, 603 U.S. __ (2024), overturning Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 468 U.S. 837 (1984), which, for the past 40 years, had afforded federal administrative agencies deference when reasonably interpreting ambiguous federal statutes. A complete explanation of Chevron deference and the impact of Loper Bright to the administrative state in general can be found here.

While the end of Chevron is sure to take power away from certain federal agencies, it is less clear what, if any, impact there may be on the AbilityOne Program. Loper Bright, while explicitly overturning Chevron, does not call into question situations in which an agency is given explicit rulemaking authority by Congress. The JWOD Act grants the AbilityOne Commission the explicit authority to (1) maintain the Procurement List; (2) determine the fair market price of items on the Procurement List; and (3) promulgate rules and regulations to effectuate the Program. The Commission has acted on its mandate and developed regulations to guide the Program that go far beyond the plain language of the JWOD Act. However, because the Commission was given explicit authority from Congress to develop these regulations, it likely will still be afforded deference by courts in the event there is a challenge to the Commission’s actions.

In addition to not addressing explicit rulemaking authority given to an agency, the Court in Loper Bright makes clear that this decision does not overturn any existing agency action or cases addressing agency action. Instead, this decision simply provides that Courts “must exercise their independent judgment in deciding whether an agency has acted within its statutory authority” and “may not defer” to the agency’s interpretation in any in future challenges to agency action.

Loper Bright is likely to lead to an increase in challenges to agency action, and an increase in courts overturning agency action, but it may not immediately impact the AbilityOne Program. To successfully challenge the Commission’s rulemaking, a challenger will likely need to either show the rulemaking goes beyond the explicit authority afforded to the Commission in the JWOD Act, or the challenger will need to overcome the deference that has already been given to the Commission under existing law. For now, it looks like the AbilityOne Program will continue with business as usual, but as courts begin interpreting Loper Bright and challenges to agency action increase, the Commission and the Program may eventually find themselves in a challenger’s crosshairs.

By William Hampshire, Verity Musselwhite Steel, Yannick Ramsamy, and Paul Whinder

Seyfarth Synopsis: Following the Labour Party’s victory in the General Election on 4 July 2024, it is now expected that they will keep their promise of tabling some significant legislative changes to the UK’s labor law within their first 100 days of government.

These planned changes include the following:

  • Day 1 rights for employees to statutory sick pay, parental leave and, perhaps most significantly, protection from unfair dismissal (which, in most circumstances, currently requires 2 years’ seniority);
  • Making flexible working a “default right”;
  • Requiring all employment contracts to inform employees of their right to join a trade union;
  • Introducing a right for employees to “switch off” outside of working hours;
  • Prohibiting the dismissal of employees for a 6-month period following their return from maternity leave;
  • Introducing a statutory right to unpaid bereavement / compassionate leave;
  • Extending the limitation periods for bringing claims from 3 months to 6 months;
  • New duties on employers with 250 and more employees to (i) produce ethnicity and disability pay gap report and (ii) have a menopause ‘action plan’; and
  • Creating a single enforcement body to enforce worker rights with powers to inspect workplaces and bring civil proceedings against employers.

While many of these planned changes will likely take at least a few years to become law, it would be prudent for employers with a UK presence to start considering their implications now and, where practical, formulate plans on how to respond to them.

About the Program: In today’s fast-paced business environment, intellectual property (IP) reigns supreme. Among the various forms of IP, trade secrets hold a distinct advantage, offering a competitive edge that’s both elusive and invaluable. Yet, in an era marked by technological advancements and increased connectivity, safeguarding these trade secrets poses a significant challenge.

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As innovators and custodians of proprietary information, organizations continually face the challenge of mitigating the risks associated with trade secret misappropriation. The repercussions of such breaches can be severe, ranging from financial losses to legal entanglements and reputational damage. In this context, the ability to detect and respond to trade secret violations effectively (including via litigation) is paramount.

Join Seyfarth partners, alongside guest speaker Dan Fuller, Managing Director of StoneTurn, as we explore the intricacies of forensic examinations and their crucial role in protecting trade secrets and pursuing claims against wrongdoers when they are misappropriated. Through real-world case studies and practical examples, our Trade Secrets, Computer Fraud, and Non-Competes and eDiscovery and Information Governance team will equip you with the knowledge and strategies needed to bolster your IP protection efforts.

Key Discussion Points:

  • The pivotal role of forensic examinations in trade secret protection
  • Best practices for identifying and addressing trade secret breaches
  • Real-world case studies showcasing the efficacy of forensic examinations
  • Strategies for enhancing IP protection in an ever-evolving threat landscape
  • Use of forensic examinations in litigation (whether on behalf of the plaintiff or the defendant)

Speakers

Dawn Mertineit, Partner, Seyfarth Shaw LLP
Matthew Christoff, Partner, Seyfarth Shaw LLP
Dan Fuller, Managing Director, StoneTurn

If you have any questions, please contact Joan Gwak at jgwak@seyfarth.com and reference this event.

Learn more about our Trade Secrets, Computer Fraud & Non-Competes practice.

To comply with State CLE Requirements, CLE forms requesting credit in IL or CA must be received before the end of the month in which the program took place. Credit will not be issued for forms received after such date. For all other jurisdictions forms must be submitted within 10 business days of the program taking place or we will not be able to process the request.

Our programming is accredited for CLE in CA, IL, and NY. Credit will be applied as requested, but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. CLE decisions are made by each local board, and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com.

Please note that programming under 60 minutes of CLE content is not eligible for credit in GA. programs that are not open to the public are not eligible for credit in NC.

By Jesse M. Coleman and Katherine Perrelli

Commentary: The Court ruled on Wednesday, July 3, what most of the legal community already believed: that the FTC lacked the substantive rulemaking authority to issue a nationwide ban on non-competes between employers and workers. Nevertheless, the  ruling itself is not likely one that anyone expected.   

On the one hand, the Court enjoined the FTC Rule, holding that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).”  However, the Court then turned around and only applied that injunction to the FTC Rule as it applied to the named plaintiffs, arguing that the plaintiffs failed to sufficiently brief a nationwide injunction or associational standing. Accordingly, the Court left the FTC Rule in place for every other otherwise affected employer in America. 

Ultimately, the Court has managed to thread the needle in such a way as to likely make everyone who reads the ruling unhappy. All of the necessary analysis is present to strike down the FTC Rule. Nevertheless, the Order leaves the whole world uncertain as to whether further briefing and a ruling on the merits will ultimately lead to a nationwide injunction or narrow relief just for the named parties. The Court also left open whether the Rule is unconstitutional under the Major Questions Doctrine and Non-Delegation Doctrine, issues that both sides heavily briefed.

The Court intends to rule on the ultimate merits of this action on or before August 30, 2024, only five days before the effective date of the Rule for everyone other than the named plaintiffs. This likely means many of the issues raised above may not be resolved until then. 


Ruling: 

  • The Federal Trade Commission (FTC) and its respective agents, servants, employees, and attorneys, and all persons acting in concert with the FTC are wholly enjoined from implementation of or enforcement of the Non-Compete Rule—16 C.F.R. § 910.1-.6—against Plaintiff Ryan, LLC, from the date of this order to the Court’s final adjudication on the merits. The Court hereby stays the effective date of the Rule as to Plaintiff Ryan, LLC.
  • The Federal Trade Commission (FTC) and its respective agents, servants, employees, and attorneys, and all persons acting in concert with the FTC are wholly enjoined from implementation of or enforcement of the Non- Compete Rule—16 C.F.R. § 910.1-.6—against Plaintiff Intervenors: Chamber of Commerce of the United States of America; Business Roundtable; Texas Association of Business; and Longview Chamber of Commerce, from the date of this order to the Court’s final adjudication on the merits. The Court hereby stays the effective date of the Rule as to these Plaintiff-Intervenors.

While this order is preliminary, the Court intends to rule on the ultimate merits of this action on or before August 30, 2024.

Analysis:

The Court granted a preliminary injunction because:

  • There was a likelihood of success on the merits:
    • “[T]he text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).”  Order 1.
      • Plainly read, the Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition. Indeed, the Act says as much by alluding to this power in 15 U.S.C. § 57a. See 15 U.S.C. § 57a.
      • However, after reviewing the text, structure, and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method. Section 6(g) is “indeed a ‘housekeeping statute,’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’” Chrysler Corp. v. Brown, 441 U.S. 281, 310, 99 S. Ct. 1705, 1722, 60 L. Ed. 2d 208 (1979).
    • The Rule is “arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. It imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’”  Order 21 (quoting Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S. Ct. 2856, 2867 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S. Ct. 239, 246, 9 L. Ed. 2d 207 (1962)).
    • The Court did not address arguments about whether the Ban is invalid because it represents a “Major Question” Doctrine or runs afoul of the “Non-Delegation Doctrine,” two constitutional rules of interpretation that the opponents of the Ban raised in their briefing.
  • Irreparable harm: “Given Plaintiffs’ nonrecoverable costs of complying with the Rule, bolstered by the FTC’s failure to make a developed responsive argument, the Court concludes Plaintiffs have met their burden of showing irreparable harm in the absence of injunctive relief.”  Order 27.
  • Balance of Equities and Public Interest:
    • “On this record, it is evident that if the requested injunctive relief is not granted, the injury to both Plaintiffs and the public interest would be great.” Order 28.
    • “Granting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC.” Id.
    • “Further, the Rule makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest.” Id.

The Court declined to grant further relief, leaving the door open for a nationwide injunction and associational standing with further briefing.

  • No nationwide injunction:  Despite Ryan asking for a nationwide injunction, the Court declined to extend the relief beyond the named plaintiffs.
    • The court recognized that a court has the power “in appropriate circumstances, to issue a nationwide injunction.”  Id. at 30. 
    • Nevertheless, because of the limited guidance provided by the Fifth Circuit as to what are such “appropriate circumstances”, the Court declined “to view the circumstances of this proceeding as an “appropriate circumstance that would merit nationwide relief.” 
    • The Court noted Plaintiffs failed to brief “how or why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs, at this preliminary stage.”
  • No associational standing:   Despite Intervenor-Plaintiffs seeking associational standing, the Court declined to grant such relief for failure to sufficiently brief it:
    • “Plaintiff-Intervenors have directed the Court to neither sufficient evidence of their respective associational member(s) for which they seek standing, nor any of the three elements that must be met regarding associational standing.”  Order 31.
    • “Without such developed briefing, the Court declines to extend injunctive relief to members of Plaintiff-Intervenors.”  Id.

Seyfarth Synopsis: Seyfarth’s Owen Wolfe and Eddy Salcedo co-authored an article, “With AI Use, Lawyers Need to Ponder Confidentiality Stipulations,” in Bloomberg Law on July 1.

The Seyfarth attorneys discussed how lawyers must understand the risks and ensure their clients’ documents are protected when AI is used in discovery in litigations.

“As generative AI improves and becomes more accessible, it may change the way many lawyers perform their work. It’s time for them to start thinking about how to address the new realities of the technology.”

You can read the full article here.

By Jing Li

Seyfarth Synopsis: To bring Hong Kong’s Foreign-Sourced Income Exemption (FSIE) regime in line with the European Union’s updated guidance on FSIE regimes promulgated in December 2022, the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 was enacted on 8 December 2023 to refine Hong Kong’s FSIE regime with effect from 1 January 2024, under which, subject to certain carve-outs and reliefs, the scope of assets in relation to foreign-sourced disposal gains has been expanded to cover all types of property. A new intra-group transfer relief has also been introduced to defer charging of tax if the property concerned is transferred between associated entities, subject to specific anti-abuse rules.

Hong Kong was added to Annex II of the European Union’s list of non-cooperative jurisdictions for tax purposes in October 2021, meaning that the European Union would further monitor Hong Kong’s territorial tax system and might consider moving Hong Kong to its so-called blacklist. 

In response, the Hong Kong Government introduced an intricate FSIE regime under the Inland Revenue Ordinance (Cap. 112) whereby, for the first time, beginning on 1 January 2023 (with no grandfathering arrangement), specified foreign-sourced income arising in or derived from a territory outside of Hong Kong, including (i) interest, (ii) dividend, (iii) income derived from the use of IP, and (iv) equity interest disposal gain, accrued to and received in Hong Kong by a member of a multinational enterprise (MNE) group[1] carrying on a trade, profession, or business in Hong Kong (irrespective of its revenue or asset size) will be considered taxable in Hong Kong and subject to profits tax. 

From 1 January 2024 onwards, Hong Kong’s FSIE regime has expanded disposal gains to the sale of all kinds of property (movable or immovable property), rather than just the disposal of equity interest. After implementation of the new changes, the European Union considered that Hong Kong has fulfilled its commitment by amending the tax regime and moved it from the watchlist to the “white” list on 20 February 2024.

This represents a marked departure from the established tax law in Hong Kong. For those unaware, Hong Kong adopts a territorial source principle of taxation (that is only profits that have a source in Hong Kong are taxable in Hong Kong, and profits sourced elsewhere are not subject to Hong Kong profits tax). In any case, it is the Inland Revenue Department’s stance that Hong Kong will continue to adhere to the territorial source principle of taxation, and that determination on the source of profits shall not be affected by the introduction of the FSIE regime. 

Exemptions

As with all things tax, there are several available exemptions. For one, specified foreign-sourced income will not include any interest, dividend, or non-IP disposal gain that accrues to regulated financial entities in Hong Kong and is derived by or is incidental to that entity’s business as a regulated financial entity.

Also, the FSIE will not be applicable if the MNE entity in Hong Kong can meet the economic substance requirement (for interest, dividend, or non-IP disposal gain), the nexus requirement (for qualifying general IP come (e.g., royalty) and qualifying IP disposal gain), or the participation requirement (for dividend or equity interest disposal gain) subject to a number of anti-abuse rules. 

Obligations of an MNE Entity

The FSIE regime is essentially a self-reporting regime and an MNE entity in Hong Kong is required, among others, to i) report its specified foreign-sourced income and amount of chargeable specified foreign-sourced income in its relevant profits tax return, ii) notify the Commissioner that it is chargeable to profits tax within four months after the end of the basis period of the year of assessment during which the income is received in Hong Kong in case no profits tax return has been issued to it for the year of assessment concerned, and iii) retain records of transactions relating to the specified foreign-sourced income at least until the later of the expiry of seven years after the completion of those transactions, or the expiry of seven years after the income is or regarded as received in Hong Kong

Advance Ruling

To reduce tax compliance burden and/or to obtain tax certainty, an MNE entity can apply to the Commissioner for advance rulings on its compliance with the economic substance requirement in relation to foreign-sourced interest, dividend, and/or non-IP disposal gain if the entity is carrying on a trade, profession, or business in Hong Kong and its specified foreign-sourced interest, dividend, or equity interest disposal gain accrues on or after 1 January 2023 or its specified foreign-sourced non-IP disposal gain (other than equity interest disposal gain) accrues on or after 1 January 2024.

Seyfarth has experience advising on international taxation. Our attorneys enjoy partnering with clients to maximize business opportunities by structuring creative, tax-efficient solutions.


[1] An MNE group means a group that includes at least one entity or permanent establishment that is not located or established in the jurisdiction of the ultimate parent entity of the group.

By Marcus Mintz and Jeremy Cohen

Seyfarth Synopsis: Both the federal Defend Trade Secrets Act of 2016 (“DTSA”) and Pennsylvania Uniform Trade Secrets Act (“PUTSA”) provide that a defendant may recover its attorneys’ fees if it demonstrates that a claim for misappropriation of trade secrets is brought in “bad faith.” See 18 U.S.C. § 1836(b)(3)(D); 12 Pa. Cons. Stat. § 5305(1). But who decides “bad faith” – a judge or a jury?

In Elmagin Capital, LLC v. Chen, et al., Case No. 22-2739 (June 5, 2024), the United States Court of Appeals for the Third Circuit, albeit in a non-precedential opinion, held that statutory fee-shifting is an equitable remedy, not a legal one, and that it is therefore for the judge to determine “bad faith” as a predicate to a fee award.

Plaintiff Elmagin Capital, LLC brought claims against its former employee and co-founder, Chao Chen, for misappropriating its trade secrets – namely, trading strategies in the wholesale electricity trading market – to start a competing business.  Following a May 2022 trial, the jury found that Elmagin’s trading strategies were trade secrets, but that Chen did not use them to develop the trading strategies used by Entegrid. The jury therefore decided in Chen’s favor.  In conjunction with his defense, Chen accused Elmagin of bringing the lawsuit in bad faith and sought attorneys’ fees under the DTSA and PUTSA. The trial court put the question of bad faith to the jury, which found that Elmagin acted in bad faith. However, the court considered the jury’s determination as “advisory” and declined to award Chen fees because it determined that Elmagin had at least “some evidence” in support of its claims.

On appeal, the Third Circuit affirmed the trial court’s refusal to accept the jury’s bad faith verdict and its ensuing denial of fees. In doing so, the Third Circuit held that Chen lacked a right to a jury in determining whether attorneys’ fees should be awarded because statutory fee awards have been regarded  as equitable remedies going back at least to the English courts of the 1700s, even if substantive trade secrets statutes were not enacted until many centuries later. The Third Circuit also held that even if it is for a jury to determine bad faith under the statutes, there was sufficient evidence for the trial judge to hold as a matter of law under Fed. R. Civ. P. 50(a)(1) that Chen failed to carry his burden of proving bad faith.

Although it is non-precedential, the Elmagin decision contains a thorough legal and historical analysis that supports the conclusion that statutory fee-shifting claims under the DTSA and PUTSA are equitable and do not carry with them the right to a jury.

About the Program: Much has happened in the ten years since our national Wage and Hour Litigation Practice Group wrote ALM’s authoritative Wage & Hour Collective and Class Litigation treatise. We are excited to continue our informative webinar series to discuss—in bite-sized increments—the past decade’s most important changes to the federal and state employee pay litigation landscape.

The final installment of our “Time Well Spent” webinar series will focus on the central question of what constitutes “work time” for which nonexempt employees must be paid. The panelists will focus on hot litigation topics addressing the scope of compensable “work time” under the FLSA and California law, such as:

  • Time spent on meal periods and rest breaks;
  • Time spent undergoing security checks;
  • Time spent booting up and shutting down computers and programs;
  • Time spent traveling to and from work sites, both on-premises and off-premises;
  • Time spent in training, or in an internship capacity; and
  • Time spent checking and responding to employment-related emails or texts after regular work hours.

The panelists’ discussion will address application of the de minimis doctrine in federal and California courts, as well as important developments regarding employer practices such as “rounding” recorded work time and allowing timeclock “grace periods.”

In addition, the panelists will explore best practices for managing and supervising compensable work hours for employees working from home or in a hybrid capacity.

* * * *

Cost – There is no cost to attend, however, registration is required.

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Thursday, July 11, 2024
2:00 p.m. to 2:45 p.m. Eastern
1:00 p.m. to 1:45 p.m. Central
12:00 p.m. to 12:45 p.m. Mountain
11:00 a.m. to 11:45 a.m. Pacific


Our Wage & Hour Collective and Class Litigation treatise, published by ALM Law Journal Press, is widely recognized as an authoritative resource on the subject and is commonly used by lawyers, judges, and academicians in researching the many complex and evolving procedural and substantive defense issues that may ultimately determine case outcomes. 

Get your copy here

Speakers

Bailey K. Bifoss, Partner, Seyfarth Shaw LLP
John P. Phillips, Partner, Seyfarth Shaw LLP
Kelly J. Koelker, Senior Counsel, Seyfarth Shaw LLP (Moderator)

Learn more about our Wage Hour Class & Collective Actions practice.


If you have any questions, please contact Donna Miskiewicz at dmiskiewicz@seyfarth.com and reference this event.

This program is accredited for CLE in CA, IL, and NY. Credit will be applied as requested but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. The following jurisdictions do not require CLE, but attendees will receive general certificates of attendance: DC, MA, MD, MI, SD. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. Please note that attendance must be submitted within 10 business days of the program taking place. CLE decisions are made by each local board and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com

Please note that programming under 50 minutes of CLE content is not eligible for credit in NJ, and programming under 60 minutes of CLE content is not eligible for credit in GA. Programs that are not open to the public are not eligible for credit in N

Seyfarth Synopsis: The Employment Law Lookout is taking a holiday this week, but will resume delivering insightful discourse and updates on the day’s most pressing workplace issues next week.

We wish all of our readers, contributors, and editors a safe and happy holiday.

Rest assured knowing that we’ll be on the lookout for more management insights to bring you next week.

Thank you and Happy Holidays.

By Eron ReidJesse M. Coleman, and Katherine Perrelli

The FTC’s recently issued Final Rule banning non-competes for most workers prohibits an employer from (1) threatening to enforce a non-compete against a worker, (2) advising the worker that, due to a non-compete, they should not pursue a particular job opportunity, or (3) telling the worker that the worker is subject to a non-compete.[1] The FTC asserts that these type of representations can have an in terrorem effect on workers who are unaware and unable to vindicate their legal rights against exploitative employers, thereby causing an adverse effect on competition. The Final Rule contains an exception, however, for enforcement or attempted enforcement of non-competes where an employer has a “good-faith” belief that the provisions of the Final Rule do not apply.[2] Where this exception applies, however, remains an open question.

The Final Rule’s good-faith exception states that “it is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that this [Non-Compete Clause Rule] is inapplicable.”[3]

According to the FTC, the good faith exception of § 910.3(c) was added out of an abundance of caution “to ensure that the final rule does not infringe on activity that is protected by the First Amendment and to improve clarity in § 910.2(a).”[4]

 The FTC included a similar version of the good faith exception in the proposed rule issued last January, and represents the agency’s attempt to balance its regulation of anti-competitive activity with an employer’s protected speech and right to petition under the First Amendment.

The foundation for the good faith exception is the United States Supreme Court’s Noerr-Pennington doctrine, which grants antitrust immunity under the First Amendment to parties petitioning the government for relief, even if the relief may tend to restrict competition.[5] Protected speech under the Noerr-Pennington doctrine extends to litigation activities and pre-litigation communications.

The good faith exception, the FTC contends, is intended to ensure that the Final Rule does not infringe upon an employer’s actions towards its employees that may be protected under the First Amendment. By adding the good faith exception, the FTC recognizes that an employer has First Amendment rights to make subjectively truthful statements concerning the employer-employee relationship, and to petition the courts to enforce the employee’s contractual obligations, even if the employer’s belief is found to be incorrect or the lawsuit is unsuccessful. The Final Rule makes clear, however, that the good faith exception does not protect willful misrepresentations about whether a non-compete covered by the rule is enforceable.[6]

So, what does that mean for employers?

The FTC has not suggested an instance in which an employer may have a good faith basis to believe that the Final Rule may be inapplicable.  Presumably, such a good-faith basis may exist where the FTC rules that a restrictive covenant other than an express non-compete (such as a non-solicit or non-disclosure clause) is ultimately deemed a functional non-compete under the new rule, but the employer can demonstrate that it had reason to believe otherwise.[7] The exception may also come into play in those instances where the rule is not clear on the scope of a definition or exception. For example, it is unclear whether partners or members with an ownership stake in a business are considered “workers” covered by the final rule. The rule does not specifically address that issue other than to state that “sole proprietors” can be considered “workers”. The FTC’s comments indicate that such partners, members, or other holders of ownership stakes “may” be covered by the sale-of-business exception, assuming their noncompete agreements are tied to the sale of their ownership stake in the business.  Whether or not a partner or business owner who retains an ownership interest in the business can be held to a noncompete after they stop working for the business is unclear. Given that the FTC has not provided any guidance on the good faith exception,  employers must proceed with caution.

One area exists, however, where the FTC has stated no good-faith basis exists:  the FTC expressly stated that pending legal challenges to the rule’s validity are insufficient to provide cover to employers.

The FTC’s proposed version of the non-compete rule cautioned that the good-faith exception would not apply “where the validity of the rule . . . has been adjudicated and upheld.” However, the prior version of the text appeared to provide a temporary safe harbor to employers during pending litigation, but the agency ultimately declined to adopt that language into the Final Rule, believing that it would create confusion while challenges to the non-compete ban were ongoing.[8]

The FTC clarified its stance in the Final Rule by stating that “the absence of a judicial ruling on the validity of the final rule does not create a good-faith basis for non-compliance.”[9] Therefore, unless the rule is stayed or invalidated by the courts, the FTC’s stance is that there is no good-faith for non-compliance with the Final Rule simply because litigation is pending.


[1] 16 C.F.R. § 910.2(a), 89 Fed. Reg. 38404 (May 7, 2024).

[2] 16 C.F.R. § 910.3(c).

[3] 16 C.F.R. § 910.3(c).

[4] 89 Fed. Reg. 38441 (May 7, 2024).

[5] See E.R.R. Presidents’ Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965).

[6] 89 Fed. Reg. 38441 (May 7, 2024).

[7] See 16 C.F.R. § 910.1.

[8] 89 Fed. Reg. 38441 (May 7, 2024).

[9] 89 Fed. Reg. 38341 (May 7, 2024).