After a series of preliminary, narrowly decided, and conflicting court decisions concerning requests for preliminary injunctions (see August 20, 2024 Alert), a federal district court in Texas has now entirely set aside the Federal Trade Commission (FTC) rule that would have invalidated tens of millions of non-compete agreements in the United States (see judge’s order). The court ordered that “[t]he Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” This is hardly the final chapter in this saga, however, and both employers and employees should be aware not only of the inevitable appeals and the possibility of the non-compete rule’s revival but also of other state and federal laws that will continue to impact non-compete agreements.
First, employers who had been concerned that they needed to affirmatively disclaim their existing non-compete agreements, as the non-compete rule would have directed, do not need to do so any time soon. While the FTC will likely appeal, it is exceedingly unlikely that the appellate court will reinstate the rule before full briefing and oral argument. Thus, even if the appellate court overturns the district court’s decision, that likely would not occur until well into 2025.
Second, it is unlikely that the appellate court will overturn this decision. While there are some solid legal arguments that the FTC has to support its position, the US Court of Appeals for the Fifth Circuit, which will hear this case, has a strong pro-business bent and is among the most conservative federal appellate courts in the country.
Third, while there was a federal district court decision in Pennsylvania that upheld the power of the FTC to issue the rule (see July 26, 2024 Alert), the plaintiff in that case now has no incentive to appeal, so it is unlikely that any federal appellate court other than the Fifth Circuit will weigh in on the issue. That means that there likely will not be a split between the circuit courts, and the Supreme Court may simply decline to hear any request that it review the Fifth Circuit’s ultimate decision.
Thus, while it is possible that the FTC’s non-compete ban could be revived, such revival would not happen anytime soon and is in any event unlikely.
BUT—that does not mean that all non-compete agreements are in the clear:
- Most states have some limits on non-compete agreements; some entirely ban them. In the past decade, several states have enacted legislation restricting the use of non-compete agreements.
- The FTC rule and the background research that went into it provide additional ammunition for challenging individual non-competes in state or federal court.
- The General Counsel of the National Labor Relations Board (NLRB) has argued that non-compete agreements violate the National Labor Relations Act (NLRA) (see June 1, 2023 Alert). In June, 2024, an NLRB Administrative Law Judge agreed with the General Counsel and invalidated a non-compete agreement, setting the stage for the full NLRB to consider the issue.
- Even under the court decision that invalidated the FTC’s broad rule, the FTC retains the power to bring individual enforcement actions and to claim that particular non-compete agreements are unfair methods of competition through adjudication. It seems likely that FTC will strategically pick non-compete agreements that seem particularly egregious and/or impact large numbers of employees and commence some enforcement actions in the near future.
As businesses and employees view this dynamic landscape, they will need to make decisions in real time rather than wait for the dust to settle.
Employers should take particular care to narrowly tailor any non-compete agreements so that they comply with relevant state laws and are unlikely to be easy targets for state or federal regulators looking for precedent setting examples to restrict non-competes. Employers should also make increased use of alternate means of protecting sensitive information and client relationships, such as confidentiality agreements and specific non-solicitation agreements.
Employees should understand that whatever agreement they sign very well may be enforced—the FTC will not simply invalidate it. So employees asked to sign non-competes should, if they have bargaining power, push back and seek to eliminate or limit post-employment restrictions.
This area will continue to evolve rapidly, and parties should seek legal advice before entering into any non-compete agreement.
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