Noncompete agreements, set to be relegated to history as of this month, remain relevant for now in an increasingly complex environment for companies evaluating how to treat such agreements in a restructuring scenario. In addition to the outcome of a likely appeal of a Texas federal court’s Aug. 20 nationwide injunction staying the effectiveness of a new federal rule banning such agreements, companies contemplating Chapter 11 must now grapple with a decision from the U.S. Bankruptcy Court for the Eastern District of Michigan which addresses, in a novel way, the enforceability of noncompete agreements under Section 365. Coupled with the now-stayed FTC rule on noncompete agreements, this decision raises challenging questions regarding the treatment of executory contracts and noncompetes going forward.

The FTC Rule and ‘Loper Bright’

On April 23, 2024, the Federal Trade Commission (FTC) finalized a rule banning noncompete restrictions for US employees (the FTC Rule). The FTC Rule bans new noncompete agreements and renders most existing noncompetes unenforceable except with respect to certain senior executives and provides only the FTC with a private right of action to remedy violations.