Last year, the Federal Trade Commission (“FTC”) published a historic final rule in 16 CFR Part 910 effectively banning noncompete clauses across the United States, with a scheduled effective date of September 4, 2024. The FTC’s stated intention with respect to the ban was to enhance job mobility and promote economic growth, impacting millions of workers and businesses nationwide by fostering a more dynamic and innovative economy. While the ban represented a significant shift in employment practices, it sparked multiple legal challenges that have impacted its implementation timeline and scope.
Scope and Compliance
Most existing noncompete clauses would have become unenforceable after the rule’s stated effective date. The rule would have also prohibited employers from entering into or enforcing new noncompetes for any workers, including senior executives (as defined below). However, existing noncompetes for senior executives—defined as those earning more than $151,164 annually and holding policy-making positions—would have remained enforceable. In addition, the FTC’s ban did not apply to a noncompete entered into by a person pursuant to a bona fide sale of a business. Thus, noncompetition agreements entered into by owners of a business in connection with the sale of the business or such person’s ownership interest in the business will remain valid regardless of the outcome of the legal challenges to the FTC’s noncompete ban.
To aid compliance, the FTC also removed a prior requirement for employers to formally rescind existing noncompetes. Instead, employers would only need to notify affected workers, except senior executives, that these agreements would no longer be enforced. The FTC provided model language to facilitate this communication, available at https://www.ftc.gov/system/files/ftc_gov/documents/English.docx.
Legal Challenges and Court Rulings
The FTC’s authority to issue the noncompete ban has been challenged in multiple lawsuits. On July 3, 2024, a federal court in the Northern District of Texas ruled in Ryan, LLC v. Federal Trade Commission that the FTC lacked the statutory authority to enforce the ban, deeming it “arbitrary and capricious.” On August 20, 2024, the court in this matter went a step further and ordered that the FTC’s ban on noncompetes be set aside completely. Similarly, a Florida court issued a preliminary ruling against the FTC, citing the “major questions” doctrine, which requires clear congressional authorization for rules of extraordinary economic and political significance. While the Texas ruling applies nationally and expressly provides that the FTC’s ban on noncompetes shall not be enforced or take effect, the injunction in the Florida case is limited to a single employer.
The FTC has appealed these decisions to the 5th and 11th Circuit Courts of Appeal, respectively. The Texas appeal, filed on October 18, 2024, seeks to overturn the nationwide injunction, while the Florida appeal aims to lift the preliminary ruling. If the appellate courts reach differing conclusions, the resulting circuit split could lead to Supreme Court intervention, potentially delaying final resolution until 2026.
Preparing for Potential Changes
For now, employers can continue to enforce noncompetes as allowed under state law, but they should prepare for possible changes. The FTC’s appeals do not immediately alter the current landscape, as the Texas district court’s judgment remains in effect during the appeal process. Employers are also advised to monitor related actions by the National Labor Relations Board (“NLRB”), which is scrutinizing noncompetes and similar provisions like “stay-or-pay” agreements.
Alternatives to Noncompetes
The FTC encourages employers to adopt alternatives that protect their investments without limiting worker mobility. These include trade secret laws and non-disclosure agreements (“NDAs”), which are already widely used.
What Employers Should Do Next
While the appeals process continues, employers should:
Evaluate existing noncompete agreements for compliance with state and federal laws.
Explore alternatives to noncompetes, such as NDAs and trade secret protections.
Stay informed about developments in the appeals process and related regulatory actions.
A ruling on the Texas case could arrive by mid-2025. Employers should remain vigilant and proactive as the legal landscape evolves.
Conclusion
The FTC’s landmark rule banning noncompetes has the potential to dramatically impact the American workforce and the approaches taken by companies to protect their goodwill and trade secrets. However, ongoing legal challenges, especially the Texas litigation, have cast significant doubt on whether such rule will survive legal scrutiny and take effect. Regardless, employers should prepare for the possibility of the ban’s enforcement while staying abreast of updates from the courts and regulatory agencies.
For more information about the FTC’s final rule banning noncompetes, please contact Mason Goodman at Fonss & Estigarribia LLP at mng@fellplaw.com or (858) 746-6497.
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