A federal judge has halted implementation of the Federal Trade Commission’s (FTC) highly anticipated worker non-compete rule. The rule, as written, bans existing and future non-compete agreements for virtually all workers, creating a seismic shift in employers’ ability to use such restrictions across most industries.
But on August 20, 2024, a Texas federal court judge ruled against the FTC, holding that the agency lacks the statutory authority to issue the rule, which bans most non-compete covenants with employees and other workers, and further held that the rule is arbitrary and capricious. The order was handed down in one of several pending cases challenging the FTC’s rule but is the first ruling with nationwide reach. The non-compete ban did not go into effect as was to occur on September 4, 2024, and employers have a reprieve from compliance–for now, at least.
While the Texas ruling is a final order, the FTC has until October 19, 2024, to appeal. The agency has indicated it will continue fighting to stop non-competes that could restrict workers’ ability to change jobs. Meanwhile, the outcome of the various legal challenges remains uncertain, and many states have passed or are considering non-compete restrictions of their own.
What This Means for Employers
The Texas order setting aside the non-compete rule means that otherwise valid non-compete agreements will remain lawful and subject to enforcement for now, which is good news for many employers that rely on non-compete covenants to protect their trade secrets and other legitimate business interests. However, even while employers do not have to comply with the FTC’s rule, businesses should stay abreast of legal developments and continue to consider state laws and other limitations when enforcing existing or executing new non-compete agreements.
Among its requirements, the FTC’s non-compete rule would obligate employers to provide notice to current and former workers covered by a non-compete clause that as of the effective date of the rule, their non-compete clause could not and would not be enforced against them. Employers that sent notices prior to the Texas ruling should consult with their legal advisor as to their ability to rescind or correct the notice now that the FTC’s rule is not in effect. Speaking with a legal advisor will be particularly important for any company that used the FTC’s notice language, which stated without exception that the company giving notice would not enforce any existing non-compete agreements.
Companies will also want to keep apprised of any appeal in the Texas case, Ryan LLC v. FTC. There may also be significant developments in two other cases challenging the non-compete ban, Properties of the Villages Inc. v. FTC and ATS Tree Services LLC v. FTC, which could impact how other employers can handle non-competes. The ATS Tree Services case in Pennsylvania federal court is particularly important because the judge in that case initially ruled that the FTC’s non-compete rule was valid. Ultimately, the enforceability of the FTC’s rule may be decided by the appellate courts and potentially the Supreme Court of the United States.
Even though the FTC has vowed to advance worker-friendly policies, it’s unclear whether the agency could win an appeal given the narrow view the current Supreme Court has taken of agency authority. Whether the FTC continues to defend its non-compete ban may eventually come down to the outcome of the 2024 presidential election and the administration leading the agency moving forward.
Non-Compete Considerations Remain Important
It’s worth noting that even with the ban on worker non-competes set aside for now, FTC enforcement actions can still be brought on a case-by-case basis against employers with a significant market share or industry position or employers who are using non-compete agreements in particularly problematic ways. Employers that have not already done so should review their non-compete strategies to ensure they serve legitimate business interests, that they are used judiciously, and that restrictions are narrowly tailored.
Regardless of what happens with the FTC’s non-compete ban, states continue to legislate limitations on the use of worker non-competes. California, Colorado, Minnesota, North Dakota, and Oklahoma largely prohibit non-competes with few exceptions, and several other states limit the use of non-competes with workers. How states may limit non-competes can vary significantly, so it’s necessary to understand what rules are in place in the states where you do business as well as where remote employees are located.
Worker non-competes are likely to remain a hot topic for the foreseeable future, even if the ruling blocking the FTC’s rule isn’t appealed. Businesses should be ready for possible changes as well as considering other ways to protect trade secrets and other business interests.
Alisa Nickel Ehrlich and J. Nicci Warr, Stinson LLP.
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