In a ruling that was predicted by many employment experts, a federal judge in the Northern District of Texas ruled on August 20, 2024 that the Federal Trade Commission cannot enforce its new rule (the “Non-Compete Ban”) that would have imposed a nationwide ban on most non-compete covenants. We previously wrote about the proposed FTC non-compete ban here (FTC's Game Changer: Nationwide Ban on Non-Competes).
In the court opinion, certainly to be appealed by the FTC and possibly to eventually make its way to the U.S. Supreme Court, the judge said that the FTC lacks the authority to make such a broad and sweeping rule affecting how many employers contract with their employees. The FTC has argued that Congress authorized it to make rules regarding unfair deceptive acts or practices, and that the Non-Compete Ban stems from that authority. However, the court held that the statutory authority for the FTC does not explicitly give the FTC substantive rule-making authority and even if it did, the issuance of the Non-Compete Ban was arbitrary and capricious because such a broad ban, was not based on factual evidence rather than a specific rule, targeted at harmful non-competes.
So What’s Next for Non-Competes?
The court ruled that the Non-Compete Ban “shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” For now at least, state law continues to govern the enforceability of restrictive covenants. In all 50 states, there is either a statue addressing the validity of non-compete covenants, or a body of case law narrowing the enforcement of non-competes, although determining which state’s law applies to a particular contract can be tricky. We are expecting that more states will adopt rules similar to Massachusetts that require payment to former employees during the non-compete period, or similar to California that outright ban non-competes other than in the context of a sale of business. New York’s state assembly has recently tried to adopt legislation that included a sweeping non-compete ban, which the Governor did not sign, but may soon be revived in another version.
For Executives:
An already- signed non-compete covenant, may be still enforceable, if valid under state law. The discussion around non-competes and non-solicitation covenants has brought new negotiation leverage to employees who are being asked to sign an agreement as a condition of employment. In a strong labor market, we are seeing more executives push-back and tell employers “I won’t sign this.”
For Employers:
Employers are no longer facing a looming deadline for action, or a requirement to notify all employees that their non-compete contracts are void. But that does not mean they should go back to “business as usual.” In the face of increased pressure from the labor market, employers should already be reviewing their existing practices on non-compete covenants, as well as their non-solicitation agreements, to confirm that they are narrowly tailored to support a legitimate business interest. For example, employers may want to review and strengthen their non-disclosure agreements and make sure that both IP assignment and confidentiality for trade secrets are properly addressed. Employers, especially ones with a single form agreement imposed on a broad, multistate workforce, should also review which law governs their contracts and whether the contract risks challenge, under ever-evolving state laws. In addition, the FTC has clearly indicated that it will use its power to challenge non-competes on a case-by-case basis, as the Texas judge indicated was permissable.
Future of Non-Compete Covenants:
It may take years for the appellate litigation to be resolved, so for now employers can continue to enter into non-compete agreements. Meanwhile, employers should not be surprised that employees are bolder about negotiating restrictions that feel to heavy-handed. There is also likely to be further legislative efforts at the state level to restrict targetted, harmful non-competes, while still allowing businesses to protect their legitimate interests and investments.