IMPORTANT INSIGHTS FOR EMPLOYERS
On August 20, 2024, the U.S. District Court for the Northern District of Texas delivered a crucial ruling, effectively halting the Federal Trade Commission’s (FTC) Rule prohibiting most non-compete agreements. The Rule, which was set to go into effect on September 4, 2024, was struck down by the court.
BACKGROUND
The FTC’s Rule aimed to ban the use of most non-compete clauses by employers, arguing that such clauses represent an unfair method of competition. The intent was to enhance employee mobility by eliminating barriers that could limit workers’ ability to change jobs. However, businesses and trade associations, including the U.S. Chamber of Commerce, challenged the FTC’s authority to impose such a ban. They argued that the FTC lacked the statutory power to create substantive rules governing unfair competition and could not retroactively invalidate existing contracts.
THE COURT’S DECISION
The court criticized the Rule’s one-size-fits-all approach, because the FTC failed to adequately explain the rationale behind such a sweeping regulation. As a result, the court ruled it unenforceable and issued a permanent nationwide injunction against it, meaning the Rule will not take effect on September 4, 2024.
EMPLOYER CONSIDERATIONS
This ruling carries significant implications for employers. First, it reaffirms the enforceability of well-drafted non-compete agreements tailored for the states where they are permitted.
Second, while the court’s decision halts the near-total prohibition on non-competes, it does not guarantee that all non-competes will be enforceable. Employers should carefully review state laws governing restrictive covenants, as regulations vary widely across jurisdictions.
Employers should be aware that the FTC may still attempt to challenge non-competes through targeted enforcement actions. Keeping an inventory of all restrictive covenants, including those for former employees, could be beneficial for future compliance and tracking purposes, especially if the Rule is revived by an appeals court.