Earlier this year, the Federal Trade Commission (FTC) announced a sweeping new rule banning non-compete agreements across the United States. This rule required employers to notify all employees that their existing non-compete provisions are no longer valid. The rule change was set to go into effect on September 4, 2024.
However, as anticipated, the rule faced several legal challenges. Among the first significant legal hurdles, a federal court in Texas struck down the FTC’s rule this week. This decision has left many business owners questioning the status of their non-compete agreements and what steps they should take next.
Background on the FTC’s Non-Compete Ban
The FTC’s proposed rule was one of the most aggressive regulatory actions taken by the agency in recent years. It sought to eliminate non-compete agreements entirely, arguing that these clauses harm workers by restricting their ability to seek better employment opportunities. The rule also required businesses to provide notices to employees that their non-compete clauses were void.
Business groups and employers, particularly those in industries where intellectual property and proprietary information are crucial, were quick to push back against the FTC’s rule. They argued that non-compete agreements are essential for protecting trade secrets, maintaining a competitive edge, and ensuring that key employees do not take sensitive information to competitors.
Texas Court Blocks the FTC Rule
On August 21, 2024, the United States District Court for the Southern District of Texas ruled against the FTC, blocking the implementation of its non-compete ban. The court found that the FTC overstepped its authority in attempting to enforce a blanket prohibition on non-compete agreements across all states and industries.
This ruling temporarily halts the FTC’s efforts to abolish non-competes nationwide, meaning that, for now, employers can continue to enforce these agreements.
What This Means for Employers
For employers, the Texas court’s decision means that non-compete agreements remain legally enforceable, at least until further notice. The FTC is expected to appeal the ruling to the U.S. Court of Appeals for the Fifth Circuit, and possibly even to the Supreme Court of the United States. However, these appeals will take time to resolve, potentially leaving the legal landscape uncertain for months or even years.
Given this uncertainty, what should employers do?
Advice for Employers: Wait and See
We anticipated that the FTC’s rule would face legal challenges. That’s why we advised our clients to adopt a “wait and see” approach before making any changes to their non-compete agreements. This cautious strategy has proven to be the correct course of action.
For now, employers should maintain the status quo. Continue to enforce your non-compete agreements as you did before the FTC’s rule was announced. There is no immediate need to notify employees that their non-compete clauses are void, as the Texas court’s ruling means that these agreements are still valid and enforceable.
What Happens Next?
While the Texas court’s decision provides temporary relief for employers, it is essential to stay informed about future developments. The FTC is likely to pursue an appeal, and if the U.S. Court of Appeals for the Fifth Circuit or SCOTUS ultimately rules in favor of the FTC, the non-compete ban could still go into effect.
Employers should be prepared to revisit their non-compete agreements if the legal landscape changes. If the FTC’s rule is reinstated, businesses may need to provide notices to employees and possibly restructure how they protect proprietary information.
The situation remains fluid. As we continue to monitor legal challenges closely, we recommend that businesses stay in close contact with their legal counsel to ensure that they are prepared for any changes.
Questions? Please contact our Business Transactions Group at (216) 573-6000 or [email protected].
About the Author
Louis J. Licata, Esq. is the co-managing partner at Gertsburg Licata, and co-author of “The Lawsuit-Free Company: How to Use the CoverMySix Method to Minimize Risk, Increase Value, and Protect Your Freedom.” Mr. Licata oversees the firm’s operations and directs its Global Business Group. With expertise in global strategy, new market entry, corporate governance, and risk management, Mr. Licata serves as a trusted chief legal advisor to domestic and international middle-market businesses. For consultations or inquiries, he can be reached at [email protected] or by phone at (216) 573-6000.
- Federal Trade Commission, “FTC Proposes Rule to Ban Non-Compete Clauses,” January 2024.
- United States District Court for the Southern District of Texas, “Case No. 4:24-cv-00321,” August 21, 2024.
- U.S. Court of Appeals for the Fifth Circuit, “Expected Appeal of Texas District Court Ruling,” August 2024.
Disclaimer
The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. It does not establish an attorney-client relationship, and any reliance on the information contained herein is done at your own risk. For specific legal guidance tailored to your business and jurisdiction, it is recommended to consult with a qualified attorney who can provide professional advice based on your unique circumstances.
