To Non-Compete Agreement or to Not? That is the Question.
On August 20, 2024, a federal district judge in Texas issued an order that blocks the FTC’s new non-compete rule from taking effect on September 4, 2024. The ruling, which was made in the case of Ryan LLC v. Federal Trade Commission (N.D. Tex.), applies nationwide. The judge determined that the FTC lacked authority to promulgate regulations with respect to unfair methods of competition, and that the new non-compete rule is arbitrary and capricious. The FTC has an option to appeal the ruling to the Fifth Circuit Court of Appeals.
The Federal Trade Commission's Non-Compete Clause Rule proposed in January 2023 that we have previously written about becomes effective September 4, 2024, and invalidates most noncompetition agreements on or after the Rule's effective date.
The Rule requires Employers to provide notice that the noncompetition provisions are no longer enforceable to those workers with existing noncompetition agreements. The only exception to the Rule is senior executives who are already subject to noncompetition agreements. Senior executives not yet subject to a noncompetition as of September 4, 2024, are not included in the exception. The Rule defines senior executives as those earning $151,164 or more who are in a policy-making position.
Once effective, employers who enter into noncompetition agreements with employees, attempt to enforce existing noncompetition agreements or clauses with existing employees, or represent their employee is subject to a noncompetition agreement are deemed to have engaged in unfair competition. The Rule provides a means of reporting the violations to the FTC.
Noncompetition as defined by the Rule pertains to any provision prohibiting, penalizing or functioning so as to prohibit a worker from seeking or accepting employment with a different employer or operating a business in the United States after that worker is no longer employed with the employer. The Rule defines a worker to include employees, independent contractors, externs, interns, volunteers, apprentices and/or sole proprietors. The Rule does not apply to other forms of restrictive covenants such as non-solicitation agreements limited to soliciting customers or employees (that are otherwise compliant with their respective state laws) or non-disclosure agreements because they do not prohibit a worker from accepting other employment once employment has ended. The FTC stated non-disclosure agreements and trade secret laws provide employers with "viable, well-established means of protecting investment in trade secrets."
The Rule does not apply to noncompetition provisions pursuant to a bona fide sale of a business or to cause of actions filed prior to the Rule's effective date. It is not an unfair method of competition to enforce or attempt to enforce a non-compete agreement or make representations about a non-compete agreement where a person has a good-faith believe that the Rule is inapplicable.
A Pennsylvania federal district court denied a preliminary injunctions seeking to halt the Rule and a Texas federal district court considers whether to grant a preliminary injunction on the Rule on August 30. Both opinions are or will be appealed to their respective federal courts and we await any determination as to whether either of those could result in any nationwide impact.
Employers who are considering entering into noncompetition agreements could instead consider whether they are amply protected with narrowly drafted and compliant non-solicitation and nondisclosure agreements instead of noncompetition provisions which are difficult to enforce, have legal limits that often make them ineffective and are disfavored by courts. Employers with existing agreements containing noncompetition provisions should consider amending them to remove those provisions while retaining and updating the non-solicitation and non-disclosure provisions under the current states' laws where they have employees.
For more information on this topic, please contact Chris, Denny or a member of our Employment Law practice team.
Join us for a webinar on this topic!
Join Haynsworth Sinkler Boyd’s Denny Major on August 22, from 12-1 PM, for an update on the latest news regarding the FTC’s final rule on non-compete agreements. Click here to register.