On August 20, 2024, the U.S. District Court for the Northern District of Texas struck down the Federal Trade Commission’s (FTC’s) proposed ban on noncompete agreements.
As a result, the FTC’s proposed ban on noncompete agreements did not take effect on September 4, 2024, as intended.
The court ruled that the FTC did not have the authority to ban noncompete agreements, and the FTC’s rule was arbitrary and capricious.
The FTC’s ban would have covered almost all existing and new noncompete agreements for employees.
It should be noted that the court’s decision does not prevent the FTC from addressing noncompete agreements on a case-by-case basis.
History of the FTC Ban
On April 23, 2024, the FTC announced its Final Non-Compete Clause Rule (“Final Rule”), which would have banned most post-employment non-compete agreements between an employer and employee. The Final Rule was scheduled to become effective 120 days after being published in the Federal Register (Effective Date).
The Final Rule was published in the Federal Register and was scheduled to take effect September 4, 2024
Key Points of the Proposed FTC Ban
The Final Rule would have prohibited an employer from entering into, or attempting to enter into, a non-compete agreement with a “worker” (including, e.g., employees and independent contractors) or representing that a worker is subject to a non- compete agreement. The Final Rule would have allowed employers to maintain existing non-compete agreements with “senior executives,” (those with over
$151,164 in annual compensation and in a policy making position for the business), but would have barred an employer from entering into, or attempting to enter into, a non-compete agreement with a senior executive after the Effective Date of the Final Rule.
It should be noted that the Final Rule did not apply to non-compete agreements that were entered into by a person pursuant to a bona fide sale of a business entity (optometry practice).
The Final Rule did not prohibit employers from enforcing non-compete agreements where the cause of action related to the non-compete agreements accrued prior to the Effective Date of the Final Rule.
The Final Rule further stated that it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations regarding a non- compete agreement where a person has a good-faith basis to believe that the Final Rule is not applicable.
The intent of the Final Rule was to supersede any state law, regulation, or order to the extent that the state law was inconsistent with the FTC rule.
Under the Final Rule, an employer was required to provide clear and conspicuous notice to workers that were subject to a prohibited non-compete, in an individualized communication, that the worker’s non-compete agreement will not be, and cannot legally be, enforced against the worker.
An employer was also required to provide notice by the Final Rule’s Effective Date by hand-delivery, by mail at the worker’s last known street address, by email, or by text message.
The Final Rule bans almost all non-compete agreements between employers and workers, but does not explicitly ban non-disclosure agreements, customer non- solicitation agreements, or employee non-solicitation agreements.
What’s Next?
It will remain to be seen whether the FTC will appeal the court’s decision.
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