By Robert O. Rice and Rebekah Watts
On Tuesday, August 20, 2024, a federal judge blocked the Federal Trade Commission’s proposed rule banning non-compete agreements in Utah and across the nation. This ruling prevents the FTC’s non-compete rule from taking effect on September 4, 2024, as previously scheduled. The ruling from Judge Ada Brown of the US District Court for the Northern District of Texas has nationwide effect.
Judge Brown ruled that the FTC lacked authority to issue the ban. The decision removes uncertainty, at least for now, regarding the enforceability of non-compete agreements. At the moment, properly drafted non-compete agreements that comply with state law may be enforceable under appropriate factual circumstances. Having said that, the FTC is already on record indicating they are considering an appeal. Last month, a federal court in the Eastern District of Pennsylvania declined to block the FTC’s rule, creating divergent rulings that could increase the likelihood of an appeal.
But for the time being, employers may rely on existing non-compete agreements and continue to require select employees to enter into non-competes as a condition of employment or continued employment. Still, employers would be wise to audit their non-compete portfolios to be sure their agreements comply with state laws, which generally require non-compete agreements be narrowly drafted to protect an employer’s true competitive interests. It’s also a good time for employers to review confidentiality, non-disclosure and non-solicitation agreements and their trade-secret-protection programs to broaden protections against unfair competition.
Employers should also monitor the status of litigation over the FTC rule. While Judge Brown’s judgment is final, appellate court action could change the outcome of her decision. And two other lawsuits challenging the FTC rule remain pending.
The FTC’s proposed rule would have had the effect of banning nearly all non-competes, restricting employers from entering into or attempting to enter into non-compete agreements with workers who did not qualify as senior executives earning over $151,164 annually. The rule would also have required employers to advise employees previously bound by non-compete agreements that their non-compete restrictions were no longer valid. While the final FTC rule would not have prohibited employers from enforcing noncompete agreements when the cause of action accrued before the September 4 effective date, the rule would have barred most enforcement actions after September 4, 2024.
