Final Defeat of Non-Competes: Delayed or Derailed?
Of all the many aspects of the employer-employee relationship, few implicate the core interests of both parties and raise as much skepticism and disdain among judges, legislators, and employees as non-competition agreements. Because non-competes restrict the ability of workers to earn a living in their chosen field or profession after their employment ends, they have for many years been the subject of a sustained, if piecemeal, assault in courtrooms and state legislatures where attempts have been made to limit their scope and enforceability or ban them altogether.
2024 was set to be the culmination of this multi-front war on non-competes after the Federal Trade Commission (FTC) adopted a Final Rule in April (the original rule was first proposed in January 2023) that would have effectively rendered the overwhelming majority of existing and future non-competition agreements void and unenforceable. This nationwide ban was to go into effect on September 4, 2024. Unsurprisingly, however, litigation challenging the rule ensued mere hours after it was issued. As discussed below, those efforts have, at least for now, put the ban in legal limbo, leaving millions of employers and employees unsure of what lies ahead for non-competes and equally unclear as to what, if anything, they should do now to protect their interests.
What the FTC’s Final Rule Said
The Final Rule declared that, subject to three specified exceptions, all current and contemplated non-competition agreements and clauses constituted an “unfair method of competition” under the Federal Trade Commission Act and thus were prohibited as a violation of federal law. As defined in the rule, a “non-compete clause” is any “term or condition of employment” that “prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work in the United States with another business, or owning their own business in the United States, after their current job ends.
The Final Rule prohibited any person from:
- Entering into or attempting to enter into a non-compete clause.
- Enforcing or trying to enforce a non-compete clause.
- Representing that a worker is subject to a non-compete clause.
In addition, the rule also requires employers to notify non-excepted employees that existing non-competes would not be enforced.
There were three main exceptions to the Final Rule’s ban on non-competes:
- “Senior Executives” – The ban did not apply to existing non-competes involving “senior executives” (a worker who earns more than $151,164 per year and is in a “policy-making position”). However, the rule prohibited employers from entering into or enforcing new non-competes with any senior executive after the Final Rule’s effective date.
- Seller of a Business – The rule did not ban non-compete provisions signed by a business owner as part of the sale of their ownership interest in the business or the sale of all or substantially all of the entity’s operating assets.
- Working Outside the U.S. – The Final Rule only applied to workers who work in or own a business in the United States. Non-compete provisions that would prevent a worker from seeking or accepting employment or owning a business solely outside the United States are not covered.
Notably, the Final Rule did not prohibit non-compete agreements between franchisors and franchisees, although it banned non-competes between employees of a franchisee or franchisor.
Impact on NDA’s
Although the rule does not specifically prohibit non-disclosure agreements (NDAs)’, the FTC has said that an NDA which bars a worker from disclosing, in any future job, any information that is ‘usable in’ or ‘relates’ to the industry in which they work could fall within the prohibition.
Litigation, Injunctions, and Appeals Following the Adoption of the Final Rule
As noted, legal challenges to the ban were filed almost immediately after the Final Rule was adopted. In one case, Trump-appointed U.S. District Judge Ada Brown of the U.S. District Court for the Northern District of Texas issued a nationwide injunction on August 20, 2024, just days before the rule’s effective date, that banned enforcement and implementation of the ban.
Brown’s nationwide injunction followed a narrower ruling in the same action this summer that specifically barred the FTC from implementing and enforcing the Final Rule as to the specific plaintiffs in that case. In both instances, Brown ruled that the FTC did not have the power to issue such a sweeping ban.
“The Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action,” Brown wrote. “(The rule) is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.” On October 18, 2024, the FTC filed a notice of appeal to challenge the August 2024 ruling.
Inconsistent Rulings
A federal district court judge for the Middle District of Florida also issued a similar preliminary injunction on August 14, 2024, finding that the FTC’s ban exceeded the commission’s authority. However, a judge for the U.S. District Court for the Eastern District of Pennsylvania reached the opposite conclusion in July, holding that the FTC acted “within its authority under the [FTC] Act in designating all non-compete clauses as ‘unfair methods of competition.'”
Where Things Stand Now
The FTC has made it clear that it intends to fight the adverse rulings striking down the Final Rule, filing a notice of appeal in the Florida case on September 24, 2024. Given the split decisions at the district court level, as well as the determination of both the FTC and those who oppose the rule, there is a distinct possibility that the fate of the non-compete ban will ultimately be decided by the U.S. Supreme Court. Of course, what the FTC does or does not do in the months ahead will, in no small part, be determined by the presidential election results.
For now, the non-compete status quo remains. This means employers will continue to look to applicable state legislation and jurisprudence to determine how to draft, defend, and enforce these agreements. Currently, over 30 states and many local jurisdictions have laws or ordinances on the books that limit the enforceability of non-competes or ban them entirely. Some of these limits are total, some relate to specific occupations, and some enforce non-compete bans based upon the compensation of the workers involved.
At the moment, New Jersey is not one of those states, as a bill drafted in February 2023 has not moved forward. With regard to New York, Gov. Kathy Hochul vetoed a ban passed by the New York legislature in December 2023, although the sponsor of that legislation stated that he would resubmit it sometime this year. Also, New York City is considering several ordinances that would prohibit many non-competes as to workers in the city.
If you have questions regarding the current non-compete state-of-play or have specific concerns regarding your company’s use of non-competition agreements, please contact Roy Hibberd at Ansell.Law.
