As we reported on August 8, 2024, earlier this year, the Federal Trade Commission (FTC) approved (3-2) a new rule that effectively bars companies from enforcing non-compete clauses for nearly all employees and independent contractors. The rule, as passed:
However, several federal lawsuits were filed seeking to prevent the FTC’s new rule from becoming effective on September 4, 2024. When we last reported, on July 23, 2024, the Honorable Kelley Brisbon Hodge of the United States District Court for the Eastern District of Pennsylvania agreed with the FTC and denied a preliminary injunction filed by ATS Tree Service LLC. Conversely, on July 3, 2024, the Honorable Ada Brown of the United States District Court for the Northern District of Texas temporarily blocked the FTC from enforcing its rule banning non-compete agreements against the plaintiffs in the case only and suggested the regulation should be struck down entirely. Judge Brown also indicated that she would make a final decision on the merits by August 30, 2024. Judge Brown came through on her promise, and on August 20, 2024, in a 27-page opinion, permanently blocked the FTC’s new rule from going into effect.
In so holding, Judge Brown granted the plaintiffs’ motion for summary judgment seeking to strike the FTC’s rule, denied the FTC’s motion for summary judgment seeking to uphold its rule, and expanded the scope of its original preliminary injunction order. Specifically, the court held that the FTC’s rule was “arbitrary and capricious,” that the FTC improperly exceeded its statutory authority by creating a new rule banning non-compete agreements, and concluded that the “sweeping” new rule violates the Administrative Procedure Act. In layman’s terms, the FTC’s rule is dead, for now…
We say “for now” because while the FTC has not explicitly stated that it intends to appeal Judge Brown’s order, the FTC has indicated that it was disappointed with the ruling and is “seriously considering a potential appeal.” While that appeal process will take time, the fact that Judge Hodge in the Eastern District of Pennsylvania previously upheld the FTC’s rule at least gives the new rule a glimmer of hope that a federal appellate court (or the U.S. Supreme Court) will reverse Judge Brown and allow the rule to go into effect. However, absent an emergency motion from the FTC to let the rule take effect as scheduled while the appeal plays out, we are many months (or maybe even years) away from learning the final answer regarding the FTC’s rule.
For now, given Judge Brown’s ruling, employers are free to continue to enforce their non-compete agreements with their workers, enter into new non-compete agreements with their workers, and are not required to notify their workers that their non-compete agreements are not enforceable. However, employers must not forget about state and local laws that restrict or bar non-compete agreements because Judge Brown’s ruling does not affect those existing (or new) laws. For example, on July 17, 2024, Pennsylvania Governor Josh Shapiro signed the Fair Contracting for Health Care Practitioners Act into law, which will become effective as of January 1, 2025, and places significant restrictions on the use of non-compete agreements with doctors and other health professionals. Judge Brown’s ruling does not affect this new law.
The FTC also stated that this order “does not prevent the FTC from addressing noncompetes through case-by-base enforcement actions.” So, while the FTC’s blanket ban on non-compete agreements may never become effective, the FTC is apparently not going to back down on using its existing powers to deal with what it perceives to be an overbroad non-compete agreement. Employers, consider yourselves warned.
Regardless of what happens with any appeal (or with the other pending legal challenges to the FTC’s rule), employers should assess whether their current non-compete agreements (1) are actually necessary (i.e., can a non-solicit or non-disclosure agreement accomplish the same goal) and (2) comply with applicable state law. And while the FTC’s rule will not take effect on September 4, employers should also monitor what is coming out of other federal and state agencies because the FTC is not the only agency with its eyes on non-compete agreements and another agency (such as the NLRB) may prepare its own rule targeting non-compete agreements.
Employers should also engage experienced employment counsel to help navigate these sticky issues. And those early-to-the-party employers who already sent notice to their employees that their non-compete agreements were no longer enforceable (as the FTC’s rule would have required on September 4) should be calling their employment lawyers to figure out if those notices can legally be walked back or rescinded.
Finally, while non-compete agreements have historically been prevalent, they have come under fire in recent years, and the tide is shifting towards non-compete agreements becoming much less popular at the state level. Therefore, employers want to ensure they stay on top of the law in every state where they have workers.
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