Understanding the FTC’s New Rule on Noncompete Agreements
Last Updated on November 10, 2024
The Federal Trade Commission (FTC) issues a new rule on April 23, 2024 that drastically alters the landscape of noncompete agreements across all industries. The rule, which bans new noncompetes in all employment contexts, aims to enhance competition and worker freedom by prohibiting employers from entering into such agreements. Below is a detailed look at the FTC’s final rule, its implications, and the potential legal challenges it faces.
Legal Updates
FTC Appeals Court Ruling that Blocked Noncompete Ban as of October 18, 2024
The FTC has announced its intention to appeal a federal court decision that invalidated its proposed ban on most noncompete agreements. On October 18, 2024, the FTC filed its appeal with the U.S. Court of Appeals for the 5th Circuit, contesting an August 20, 2024 ruling from the U.S. District Court for the Northern District of Texas that rejected the agency’s noncompete rule.
As it stands, the FTC’s noncompete ban remains blocked by this district court ruling. Experts advise employers to prioritize compliance with state laws, review their restrictive covenants and consider alternatives to noncompete clauses to safeguard trade secrets.
U.S. Judge Strikes Down Ban on Noncompete Agreements as of August 20, 2024
On August 20, 2024, a federal judge in Texas barred the FTC’s noncompete rule. U.S. District Judge Ada Brown in Dallas, Texas stated that the FTC does not have the authority to ban practices that it deems as unfair methods of competition by adopting broad rules.
FTC spokesperson Victoria Graham mentioned that the agency was disappointed with the ruling, and is “seriously considering a potential appeal.” Although the decision to bar the FTC’s noncompete rule was made, the FTC can still address noncompetes on a case-by-case basis.
Update on ATS Tree Services, LLC v. Federal Trade Commission as of July 24, 2024
A judge in the U.S. District Court for the Eastern District of Pennsylvania decided on July 23, 2024 to decline to halt the FTC’s ban on noncompete agreements. By siding with the FTC, the judge stated that ATS Tree Services, LLC failed to establish that they would succeed in this lawsuit.
Update on Initial Texas Lawsuits as of July 3, 2024
A judge in the Northern District of Texas has stayed the FTC noncompete rule, and has granted the plaintiffs’ motion for preliminary injunction against the rule, effective July 3, 2024. Judge Ada Brown found that the FTC lacks rulemaking authority with respect to unfair methods of competition, under the FTC Act. However, the court did not issue a nationwide injunction, meaning that the scope of injunctive relief applies only to the below-mentioned cases in the state of Texas.
The court intends to have a ruling by August 30, 2024. MyHRBuzz will continue to provide updates as they become available.
New Noncompete Agreements Banned
The FTC’s new rule categorically bans new noncompete agreements for all workers, including senior executives. This significant change means that it is now considered an unfair method of competition for any employer to enter into a noncompete agreement with a worker after September 4, 2024. This ban aims to foster a more dynamic workforce, allowing workers to freely switch jobs and promoting healthy competition among businesses.
Existing Noncompete Agreements: Differentiated Approach
For existing noncompetes, the rule takes a nuanced approach:
- Senior Executives: Existing noncompete agreements with senior executives can remain in force. The rule defines senior executives as individuals earning more than $151,164 annually and holding policy-making positions. This group represents less than 1% of the workforce.
- Other Workers: Noncompete agreements with workers other than senior executives are no longer enforceable. Employers must notify these workers that their existing noncompetes are unenforceable before the rule takes effect. The FTC provides model notices that can be provided to the employee HERE.
The New rule does not apply to the following scenarios:
- Noncompete agreements entered into in connection with the sale of a business.
- Agreements between franchisors and franchisees.
- Post-employment restrictions such as non-disclosure agreements, non-solicitation agreements, etc. are excluded from the ruling.
- Exception was made for causes of action related to non-compete agreements that accrue before the Effective Date. This means if a worker breaches the non-compete agreement before the Effective Date may still be subject to the liability after the Effective Date.
- Non-profits entities that generally do not fall under the FTC’s regulations are excluded from the ruling.
Timeline and Legal Challenges
The rule is set to take effect on September 4, 2024, though legal challenges have already been made.
Court Challenges of the Noncompete Agreement Rule
Initial lawsuits have already been filed, including Ryan, LLC v. Federal Trade Commission, and a case by the U.S. Chamber of Commerce in the Eastern District of Texas (both of which were filed in Texas). Courts will address the following key arguments:
- FTC Authority: Critics argue that the FTC lacks the statutory authority to issue the rule.
- Delegation of Power: Legal challenges claim that the rule constitutes an unconstitutional delegation of legislative power.
- Arbitrary and Capricious: Opponents assert that the rule is arbitrary and capricious, further complicating its implementation.
The Ryan, LLC v Federal Trade commission is anticipated to have a final ruling on July 3, 2024 for an emergency stay of the final rule. The Chamber of Commerce v. Federal Trade Commission was stayed pending resolution of the Ryan, LLC v Federal Trade Commission.
In addition to the two cases noted above, the court in the ATS Tree Services, LLC v. Federal Trade Commission filed in Pennsylvania announced its intention to issue a decision on the Plaintiff’s request for a preliminary injunction by July 23, 2024.
Potential Judicial Outcomes
The courts may issue temporary restraining orders or preliminary injunctions to delay enforcement while these challenges play out. The FTC will likely face protracted legal battles, and any decision could set the stage for further appeals and a potential Supreme Court review.
Impact on Employers and Workers
Employers, particularly those operating in states where noncompete agreements were previously enforceable, face new complexities in managing their workforce. The ban on noncompete agreements is expected to reshape hiring and retention strategies. Businesses might consider alternative measures to protect intellectual property and investments in employee training, such as nondisclosure agreements and training repayment agreements.
For workers, the rule represents a significant shift, potentially allowing for greater mobility and higher wages. However, the final outcome hinges on the rule’s legal battles and the courts’ interpretation.
MyHRConcierge: Helping Employers Navigate Regulatory Compliance
The FTC’s new rule on noncompete agreements has profound implications for employers and workers across the nation. Its immediate ban on new noncompetes and differential treatment of existing agreements have drawn praise and criticism, setting the stage for legal battles and a potential overhaul of how employers manage their workforce. The outcome of these challenges will shape the employment landscape for years to come, influencing how businesses attract, retain, and develop talent while navigating an evolving regulatory environment.
MyHRConcierge offers comprehensive support to employers, keeping them informed about the latest regulatory developments that impact their business operations. The service provides timely updates on regulatory changes, including new rules and policies from agencies like the Federal Trade Commission and the Department of Labor.
MyHRConcierge also offers consulting services to help businesses navigate complex regulations, ensuring compliance and minimizing legal risks. Through personalized guidance, industry-specific expertise, and ongoing monitoring, MyHRConcierge enables employers to proactively address new challenges, maintain operational integrity and reduce potential liabilities.
Contact us today at 855-538-6947 ext 108, ccooley@myhrconcierge.com, or schedule a free consultation that is convenient for you below: