On April 23, 2024, the U.S. Federal Trade Commission ("FTC") approved a final rule banning non-compete clauses for all workers across the country, with limited exceptions (the "Rule"). Our prior Client Alert summarized the Rule Not So Fast: U.S. Chamber of Commerce Immediately Sues to Stop FTC's Non-Compete Rule from Going into Effect – Meister Seelig & Fein. The Rule was scheduled to go into effect on September 4, 2024.
Business groups immediately sued to block its implementation, including a lawsuit in the Northern District of Texas. Last month, that court issued a preliminary injunction of the Rule, but only as it applied to the parties to the case, noting that a full decision on the validity of the Rule would be issued by August 30, 2024. That decision came on August 20, 2024, with the court ordering that "the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter."
The Court's Reasoning
The court determined that the FTC lacks the authority to enact substantive rules that apply to all businesses. The court rejected what it viewed as the FTC's "one-size-fits-all approach" to non-compete clauses around the country "with no end date," noting that approach conflicted with the laws and court decisions of the 46 states that have already regulated non-compete clauses in some regard. Therefore, the court determined that the Rule is unlawful.
The court's ruling leaves intact employers' ability to enter into and enforce non-compete clauses with workers, subject only to the laws of the applicable state.
Recommendations for Employers
Although the FTC's Rule is no longer a concern, states have demonstrated increasing resistance to non-compete clauses with outcomes ranging from outright bans to prohibiting non-compete provisions for employees under certain wage thresholds and imposing garden leave or other required provisions in order to be enforceable. In the face of the injunction on the Rule, we may see action by other states and localities to enact or expand restrictions.
Given the uncertainty in the area of non-competes, employers should continue to review their use of such provisions and their existing non-compete clauses to ensure that compliance with the applicable laws of the states where employees and independent contractors works (which may be different from the state where the employer is located).
Employers may also consider alternatives that may be less susceptible to a court challenge. Properly drafted nondisclosure and non-solicitation clauses or garden leave provisions can help companies protect their competitive edge, confidential information, and business relationships.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
