On April 23, 2024, the Federal Trade Commission (FTC) issued its final rule that will ban most new and existing non-compete agreements. This rule, set to go into effect September 4, 2024, has sparked a flurry of activity as businesses scramble to navigate its requirements and legal experts seek to mount challenges to the rule itself. Here is a closer look at the status of the rule, some of the current challenges pending against it, and what you should know moving forward.
The FTC’s Rule
In a nutshell, the FTC’s new rule will prohibit employers from entering into new non-compete agreements with most workers while at the same time nullifying most existing non-competes. The rule will also require employers to notify most workers that their existing non-competes will not be enforced against them. The FTC has asserted that non-competes are an unfair method of competition in trade, as they suppress wages, stall new business formation, stifle innovation, and hinder workers from getting new jobs.
For a more in depth dive into the rule itself, see our 04.29.24 post on the new rule at https://www.ccj.com/ftc-announces-new-rule-banning-non-compete-agreements/.
Legal Challenges and Recent Developments
According to the FTC, nearly 1 in 5 U.S. workers are subject to non-compete clauses in employment contracts. The prevalence of such clauses and the wide-spread opinion that the FTC has exceeded its authority in enacting this rule have sparked legal challenges.
The Pennsylvania Ruling
One notable case involves a small tree care company in Pennsylvania, ATS Tree Services (ATS). ATS has non-competes with many of its employees, which it believes are crucial for protecting its business interests. Initially, ATS sought a preliminary injunction from a federal court in Philadelphia, which, if successful, would prevent enforcement of the FTC rule pending the final outcome of the case. In its motion for the injunction, ATS argued that the rule would cause “irreparable harm,” and that there was a strong likelihood it would succeed in challenging the FTC’s authority to issue the rule.
However, the court denied ATS’s motion, stating that the FTC has the legal authority to issue rules to prevent unfair competition. The court also found that ATS had not shown that it would suffer irreparable harm or that it would ultimately succeed on the merits of the case.
Consequently, the FTC rule will go into effect as planned and ATS’s non-compete agreements will be unenforceable, pending the final outcome of the case or until there is a separate ruling enjoining enforcement of the rule against all businesses.
The Texas Ruling
In another notable case, this time out of Texas, a federal judge gave hope to businesses when she granted a preliminary injunction prohibiting the FTC from enforcing its rule against a Texas tax firm and the U.S. Chamber of Commerce. While this judge found that the FTC did exceed its authority in enacting the rule, the ruling is only temporary pending the ultimate outcome of the case and subsequent appeals. Additionally, the ruling only applies to the specific plaintiffs in that case, and will not prevent the FTC from enforcing its rule against all other businesses.
So, Now What?
The legal landscape regarding the FTC’s non-compete ban remains fluid. Here are a few key points to keep in mind:
- Ongoing Legal Battles: The Texas judge is expected to rule on the merits of the case by late August. This outcome could further a nationwide injunction and filing of similar cases.
- Immediate Actions: If you or your business could be affected by the FTC’s non-compete ban, the best approach, for now, is to wait until September 4 to take any affirmative action on existing non-competes. But, in the meantime, it would be wise to start thinking about action plans in the event that the rule does go into effect. With new challenges being brought, rulings scheduled to be issued, and the recent Supreme Court case curbing the power of federal agencies to interpret the laws they administer, it would be a bit rash to do much more than take a “wait and see” approach until the September 4 effective date.
Future Implications: Even if the FTC rule is partially or fully blocked, non-competes have also come under attack by the National Labor Relations Board, which has recently sought to eliminate or severely restrict non-competes as well. So, with the regulatory environment around non-compete agreements changing, it might be time for business to start to consider alternative strategies for protecting trade secrets and competitive interests.
Conclusion
The FTC’s proposed rule to ban non-compete agreements represents a major shift in employment law, with significant implications for businesses and employees alike. As legal battles continue, staying informed and proactive will be crucial. Whether you’re a business owner or an employee, understanding the current state of the law and preparing for potential outcomes will help navigate this rapidly changing landscape. Please reach out to your Critchfield attorney with any questions.
Tagged In:Employment Agreements and ContractsEmployment and LaborNon-Compete and Other Restrictive Covenant DisputesRegulatory Compliance