The FTC’s New Rule
Under a new rule issued this past April, the Federal Trade Commission announced a ban on noncompete agreements between employers and employees. If the rule is upheld by the courts, the new rule may take effect as soon as September 4, 2024.
In an effort to promote competition and protect the freedom of workers to change jobs, the Federal Trade Commission has issued a new rule which will make existing noncompete agreements unenforceable beginning on September 4, 2024. The new rule also requires that employers provide notice to workers bound by existing noncompete agreements that the noncompete agreements will not be enforced against them in the future. Companies that violate the rule by entering into or attempting to enforce a noncompete provision after the effective date may be subject to civil penalties.
The new rule does not prohibit other types of post-employment restrictions, such as non-disclosure agreements and non-solicitation agreements, so long as the restriction does not effectively function as a noncompete. Further, the rule contains exceptions (1) allowing for noncompete agreements that apply only during the term of employment (2) allowing for the enforcement of noncompete agreements signed in connection with the sale of a business and (3) allowing for the enforcement of noncompete agreements previously entered into with senior executives (workers earning more than $151,164 annually and who are in policy-making positions).
Legal Challenges to Rule
Many businesses are pushing back on the rule, arguing that noncompete agreements are an essential tool to protect from the dissemination of their confidential business information to business competitors. As soon as the final rule was announced, several parties brought lawsuits seeking to invalidate the rule as going beyond the scope of the FTC’s limited statutory powers.
On July 3, 2024, a judge of the U.S. District Court for the Northern District of Texas temporarily blocked the FTC from enforcing the new rule against the party that brought the lawsuit. The judge’s temporary ruling does not apply nationwide, but the judge set a date of August 30 to issue a final ruling which very well may apply nationwide. Additionally, pending cases in other jurisdictions are simultaneously considering the same issues, and may issue rulings that apply nationwide.
Advice for Employers
Employers should prepare for the possibility that their existing noncompete agreements will become unenforceable beginning on September 4, 2024 and should prepare to send notices to all workers currently bound by a noncompete agreement. Likewise, employers should consider whether their other post-employment restrictions currently in place (such as confidentiality and nonsolicitation provisions) are robust enough to protect their trade secrets and confidential information in the event that noncompete agreements do become unenforceable. However, employers will need to stay up to date on the legal developments which may invalidate the new rule and preserve the status quo.
FTC Rule
Please contact our office if you have further questions about any of these topics or need legal help with other employment issues.