UPDATE ON FTC RULE ON NONCOMPETE AGREEMENT
On August 20, 2024, the United States District Court for the Northern District of Texas struck down the final Federal Trade Commission (FTC) rule, which was set to go into effect on September 4, 2024 and which would ban noncompetition agreements for virtually all U.S. workers, holding that the rule shall not be enforced by the FTC or take effect as to any workers or employers.
As we had previously reported, in April of 2024, the FTC approved a final rule that would have taken effect on September 4, 2024, which set forth the following:
1. The final rule banned noncompete agreements with virtually all workers after the effective date;
2. The final rule invalidated existing noncompetes with all workers except senior executives; and
3. The final rule required employers to send a clear and conspicuous notice to affected workers, by the effective date, that the worker’s noncompete clause will not and cannot be legally enforced.
The effect of the final rule would have been to replace all conflicting state laws with the FTC rule.
Until this recent ruling by the Texas court all of the legal challenges to the FTC rule had been unsuccessful. However, in the above-referenced case, the Texas court concluded that the “FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious,” declining to consider the parties’ remaining arguments as unnecessary. Thus, the court set aside the noncompete rule in its entirety, as to all workers and employers, ordering that the rule shall not be enforced or otherwise take effect.
Although this ruling states that the FTC may choose to appeal, the noncompete rule will not take effect unless an appeal by the FTC is successful. Based on the ruling, employers should not send the notice the noncompete rule would have required or modify their agreements to comply with the now-invalidated rule. However, employers still must comply with any applicable state laws concerning noncompetes and other restrictive covenants.