FTC Ban on Noncompetes Overturned

A new Federal Trade Commission (FTC) rule banning non-compete clauses was about to go into effect next month, but a Texas judge has overturned the rule. The business world has been preparing for the ban to go into effect since last April. With the FTC non-compete ban overturned, employers can still use this contractual tool pending further litigation. The FTC rule would have banned all non-compete agreements for regular employees starting in September and for highly compensated executives starting next year.

Background

Non-competes are clauses in which employees agree not to take a new job with one of their employer's competitors within a certain period or sometimes within a certain geographic area. Critics of non-compete clauses say they stifle the ability of employees to move to a new job for higher pay.

Another argument is that non-competes can stifle innovation and prevent the formation of new businesses. Proponents of non-competes say they are a valuable tool for protecting trade secrets, proprietary information, sales clients, and a company's investment in training its workers.

The FTC voted in April 2024 to ban all non-compete agreements starting in September 2024. The ban on non-competes for highly paid executives (those making over $151,164 in a calendar year) would have gone into effect in 2025 under the FTC's rule schedule. The September ban could have potentially impacted up to 30 million American employees. Non-competes are most common in technology sector jobs, healthcare jobs, and sales.

The rule would have made it unlawful for employers to ask their workers to sign non-disclosure agreements going forward. It would also have retroactively made all past non-competes unenforceable.

Court Decision

On August 20, 2024, U.S. District Judge Ada Brown ruled to overturn the FTC ban on non-competes before it goes into effect. The US Chamber of Commerce and the tax services firm Ryan LLC had sued for an injunction against the law. Judge Brown ruled that the FTC does not have the broad authority to ban all non-compete agreements nationwide. The judge ruled that decisions like that should be imposed by state legislatures or Congress instead of a federal regulatory agency.

Judge Brown seems to leave the door open to the FTC banning non-competes in specific instances where the agreements cause harm to workers. Because the new rule would have banned virtually all non-compete agreements, she ruled it arbitrary and capricious. The judge also stated that the FTC had not presented any evidence of specific harms that non-competes cause to employees. The FTC was disappointed with the ruling and stated that it may now consider an appeal of the ruling.

The US Chamber of Commerce, which was a plaintiff in the lawsuit, was pleased with Judge Brown's ruling. Chamber President and CEO Suzanne Clark stated that the FTC should not micromanage business decisions that apply to all companies across the US.

The Chamber also argued that the retroactive nature of the rule made it unenforceable since it would have nullified millions of contracts that employers and employees had willingly entered into. The Society for Human Resource Management (SHRM) also praised the ruling, stating that a blanket ban would have posed significant challenges for HR professionals trying to protect employers' intellectual property and trade secrets.

Implications for Employers

Non-compete laws for employers remain unchanged for the time being. Employers and employees can still enter into these contractual agreements because of the noncompete ban ruling. As of this writing, it is unclear whether the FTC will appeal Judge Brown's ruling to a higher court. The FTC chairperson has said that the agency might appeal, but that is not a definitive answer.

Much of the issue will hinge on the outcome of the 2024 election. A Harris-Walz administration would be likely to continue to impose the ban on non-competes going forward and, therefore, would be more likely to appeal the ruling. A Trump-Vance administration is more likely to drop the issue entirely.

One thing to note is that Judge Brown's ruling seems to leave the door open for the courts to accept a much narrower ban on non-competes in certain industries if the FTC can justify that these agreements are harmful to workers. For example, two industries that are increasingly requiring non-compete agreements from employees are fast-food restaurants and hairstyling salons. If the FTC were to propose a much more confined ban on non-competes, Judge Brown seems to have signaled that the courts would be more open to it.

Sorting out Noncompete Laws for Employers

With the federal noncompete rule overturned, the rule for employers remains unchanged (as of this writing). Employers and employees can still enter into contractual non-compete agreements. It is still enforceable if an employee has left their job with a previous employer and signed a non-compete. This entire process illustrates just how quickly employment rules can change and how companies must stay on top of existing regulations.

Do you need expert guidance on employment law compliance? Contact us at Exact Payroll for guidance on non-compete laws and regulatory changes.