On August 20, 2024, a Federal District Court Judge in Texas issued an injunction on the Federal Trade Commission’s (“FTC”) ban on employee non-compete agreements, which was set to go into effect on September 4th. The Final Noncompete Clause Rule (the “Rule”), issued by the FTC on April 23, 2024[1], banned all new noncompete agreements for employers and would have required employers to notify workers (other than senior executives) that they would not be enforcing any existing noncompete agreements against them effective September 4, 2024. Under the Rule, existing non-competes for senior executives—that is, employees who earn more than $151,164 annually and are in policy-making positions—could stay in effect; however, employers would be prohibited from entering into new non-compete agreements with senior executives.
The broad-sweeping Rule extends to all workers regardless of whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The Rule defines a noncompete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.[2]
Ryan LLC, a tax services firm, immediately filed suit against the FTC, challenging their rulemaking authority to issue the Rule. In a huge win for employers, the US District Court for the Northern District of Texas agreed with Ryan, concluding that “the FTC lacks substantive rulemaking authority with respect to unfair methods of competition” and “the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.”[3] The Court issued an Order stating that the September 4, 2024, effective date of the FTC’s non-compete ban is stayed, and the FTC is enjoined from implementing or enforcing the ban. The FTC may appeal the decision to the Fifth Circuit, but has yet to do so.
In the meantime, the stay is in effect nationwide, meaning employers are free to enter into noncompete agreements with new employees and sue to enforce existing ones. However, employers should be wary that many states have their own noncompete restrictions. For example, four states have fully banned noncompete clauses: California, Minnesota, North Dakota and Oklahoma. Many other states have varying restrictions, and the state-by-state landscape is highly nuanced. For example, Colorado has banned noncompete agreements with a carve-out for “highly compensated workers”. Some states have enacted restrictions based on industry. For example, Florida bans noncompete agreements only for a narrowly- defined subsection of physician specialists. Other states are leaning toward tighter restrictions: In December 2023, New York’s Governor vetoed a bill that would have banned non-compete agreements in New York, but left open the possibility of a future ban with a carve out for highly compensated employees. Although New York’s attempted ban has failed for now, the State still applies common law principles and looks to whether a non-compete is reasonable in scope and is designed to protect a legitimate business interest to determine whether it is enforceable.
Although non-compete agreements are safe (for now) at the federal level, employers should consult with experienced employment law counsel to ensure that their employment agreements comply with applicable state law restrictions and are up to date with the ever-evolving legal landscape. Employers should also ensure that any noncompete provision in an employment agreement is carefully drafted to describe the legitimate business interests it is designed to protect and is reasonably narrowed in scope based on applicable state law so it will pass muster if the employer ever has to enforce it.
[1] FTC Non-Compete Clause Rule 16 C.F.R. § 910 (2024).
[2] § 910.1.
[3] Ryan, LLC v. Federal Trade Commission, 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 148488 (N.D. Tex. 2024).
Comentarios