August 21, 2024 – UPDATE: Texas Federal Court Has Blocked FTC’s Prohibition on Non-competes from Taking Effect on September 4th, Nationwide.
Yesterday, the United States District Court for the Northern District of Texas ruled that the Federal Trade Commission (FTC) exceeded its statutory authority in promulgating the ban on non-competes and that the new rule was arbitrary and capricious. Therefore, the Court held that the unlawful rule shall be set-aside; specifically stating that “[t]he rule shall not be enforced or otherwise take effect on it is effective date of September 4, 2024, or thereafter.” In addition, despite arguments from the FTC that the Court’s relief should be limited to named plaintiffs of the case presented, the Judge determined that the setting aside of the FTC’s action should have nationwide effect. While it is expected that the FTC will appeal this decision, for now, the enforceability of non-compete agreements shall continue to be governed by state law.
Nationwide Blanket Ban on Non-Competes Imminent: What Small Businesses Need to Know
This past April, the Federal Trade Commission (FTC) issued a final rule banning non-compete agreements with workers, nationwide. Motivated by growing concerns about the harmful effects of non-competes on American workers, the FTC determined that the prevalent use of non-competes in the United States amounted to unfair competition. Therefore, with limited exceptions, once the rule goes into effect, existing non-competes will no longer be enforceable and entering new non-competes with employers shall be prohibited.
A non-compete is a contractual term between an employer and a worker that prevents that individual from either working for a competing business or starting a competing business. The restriction is often applicable to a certain geographic area and for a certain time after the worker’s employment ends. The FTC expects the ban to generate over 8,500 new businesses each year and anticipates that it will result in higher worker wages, lower health care costs, and boost innovation.
The only exceptions to the new rule apply to existing noncompete agreements with senior executives and non-competes related to the sale of a business. There is also a carve-out for legal actions where the cause of action related to a non-compete accrued prior to the effective date of the ban. In addition, FTC’s new rule mandates that employers provide notice to all workers, that they will no longer be enforcing existing non-competes.
The effective date of the new rule is September 4, 2024, however, there are pending lawsuits challenging the ban; arguing that the FTC lacked the authority to issue the rule and that it is overbroad. The outcome of these pending actions could invalidate the rule entirely or, at the very least, delay the effective date. Therefore, this office will provide updates, as necessary. Meanwhile, business owners should consider working with a trusted advisor to understand how this new rule will affect existing contractual relationships and begin considering alternative options for protecting their investments.
(This blog, prepared by Campanella Law Office, is for general informational purposes only and is not intended to convey specific legal advice, nor is it intended to create or constitute an attorney-client relationship.)