The Future of Non-Compete Agreements: FTC's Final Rule and Its Implications

In May, the Federal Trade Commission (“FTC”) published a controversial Non-Compete Clause Final Rule (the “Final Rule”) that impacts almost all non-compete agreements between companies and their employees and contractors – including those already in existence.  That Final Rule is scheduled to go into effect on September 4, 2024 (the “Effective Date”).

FTC Outlaws Most Non-compete Agreements Effective September 4, 2024.

So-called “non-compete agreements” that limit or prevent workers from competing with their former employers for a period, are commonly used by businesses to protect their proprietary information and client relationships.  In fact, the FTC states that approximately 30 million employees are covered by non-compete agreements. 

The FTC claims that non-compete clauses are an 'unfair method of competition.' According to their studies, these clauses reduce worker wages by an average of 5-10%, stifle new business creation, exploit workers by limiting job mobility, and hinder economic liberty.  As such, the FTC’s rule bans employers from entering non-compete clauses with their employees and independent contractors. The Final Rule also voids existing non-compete provisions, except for:

1. Senior executives in policy-making positions.
2. Executives with a total annual compensation of at least $151,164 in the preceding year.

Once a non-compete agreement with a senior executive expires, it cannot be renewed.

The Final Rule also requires that Employers send notice by the Effective Date to each employee with an existing non-compete clause that will be voided by the Final Rule that states that the ““worker’s non-compete will not be, and cannot legally be, enforced against the worker.”  If an employee violates an existing non-compete clause prior to the Effective Date, the employer can still seek enforcement.

The only total exception to the Final Rule is for non-compete clauses made as part of the bona fide sale of a business.  Therefore, if a business owner enters into such an agreement as part of the sale of their business, it will still be enforceable after the Effective Date.

Legal Challenges and Court Rulings Since the Final Rule Was Published

Since the Final Rule was published, several lawsuits have been filed in federal courts challenging the FTC’s authority to ban non-compete clauses.  As part of these suits, the plaintiffs have requested that the court issue an injunction prohibiting the Final Rule from going into effect on the Effective Date. 

On July 3, 2024, U.S. District Court for the Northern District of Texas issued a preliminary injunction staying enforcement of the Final Rule against the plaintiff in the lawsuit.  In doing so, the court stated that the FTC’s effort to implement the Final Rule likely exceeded its congressional authorization under the FTC Act and constituted an arbitrary and capricious approach to the issue of regulating non-competes.  While the court did not issue a complete injunction, it has indicated that it will issue a final ruling on the merits of matter by August 30, 2024.  That ruling could contain an injunction prohibiting the enforcement of the Final Rule nationwide.

The U.S. District Court for the Eastern District of Pennsylvania was also asked to issue an injunction stopping enforcement of the Final Rule.  On July 23, 2024, the court ruled in favor of the FTC, arguing that the FTC Act clearly empowered the agency to make by procedural and substantive rules.  As such, the court refused to enter an injunction. 

There is also a challenge pending in Florida, but it is procedurally far behind the other two cases.

Future Scenarios: Will the FTC Ban Be Enforced?

At this time, there is still a possibility that a court will issue an injunction preventing the FTC from enforcing the Final Rule on the Effective Date.  The Texas court may issue a nationwide injunction by its self-imposed deadline on August 30.  Also, the parties to the Texans and Pennsylvania cases could appeal the matter up to their respective Courts of Appeal.  Until they do, however, most non-compete agreements will become unenforceable, and businesses will be required to provide notice to their employees.

RECENT UPDATE AFTER THE INITAL PUBLCIATION OF THIS BLOG ARTICLE

On August 20, 2024, the federal court in the Northern District of Texas ruled that the Federal Trade Commission (“FTC”) exceeded its statutory authority in its rulemaking that would have resulted in an effective ban on noncompetition agreements.  The court also issued an injunction permanently blocking the FTC from enforcing the ban nationwide, which comes just weeks before the FTC’s rule was to go into effect.  The FTC is expected to appeal the court’s decision to the Fifth Circuit Court of Appeals.  The Texas court’s opinion conflicts with the federal district court in the Eastern District of Pennsylvania, which earlier this month upheld the final rule.

Jeff Wilson is a Pender & Coward shareholder focusing his practice on employment law matters, including counseling and business litigation.