Update
On April 25, 2024 Edmunds Legal issued a Client Alert discussing the Federal Trade Commission’s (FTC’s) new rule prohibiting for-profit companies from entering into non-complete agreements with service providers. In a significant turn of events, the U.S. District Court for the Northern District of Texas has blocked the FTC from implementing the new rule just two weeks before it was scheduled to take effect on September 4, 2024. While the ruling is a major development, the situation remains fluid, as the decision may be appealed.
Background
As discussed in our previous client alert on April 25, 2024, the FTC had passed a rule in a narrow 3-2 vote, which sought to ban traditional non-compete agreements. These agreements typically prevent employees or service providers from working for competitors or starting their own competing businesses after leaving a company. The rule applied to most employees and service providers, with limited exceptions for certain senior executives earning more than $151,164 annually who are in policymaking positions. Companies were required to notify affected individuals that their existing non-compete agreements were no longer enforceable and were advised to use model language provided by the FTC.
The recent court ruling has now set this rule aside, meaning that, for the time being, non-compete agreements will continue to be governed by state law, which varies widely across jurisdictions.
What Does This Mean for Your Company?
Existing Non-Compete Agreements
With the FTC rule blocked, existing non-compete agreements remain enforceable, provided they are in compliance with the applicable state law. Employers who had previously issued notices to current and former employees in anticipation of the FTC rule may now need to reconsider their approach. The following options are available:
- Wait and See: Employers can adopt a “wait and see” approach, holding off on any further action until it becomes clear whether the court’s decision will be appealed and whether the appeal will impact the enforceability of non-compete agreements.
- Issue a New Notice: Employers may decide to issue a new notice to employees and service providers, retracting the prior notice, and informing them that their existing non-compete agreements remain enforceable under state law. This step may be particularly prudent in states where non-compete agreements are still widely accepted.
- Issue a Conditional Notice: Employers could opt to issue a conditional notice stating that the prior notice is void unless and until the Texas court’s decision is overturned and the FTC rule is reinstated. This approach allows companies to maintain flexibility while providing clear communication to their workforce.
New Non-Compete Agreements
While the FTC rule is blocked, companies are not restricted by federal law from entering into new non-compete agreements. However, these agreements must still comply with the specific requirements of state law.
Looking Ahead
Despite the recent court ruling, the legal landscape for non-compete agreements remains uncertain. The FTC’s rule, although currently blocked, reflects a growing trend among states to restrict or ban non-compete agreements. For instance, states like California have long prohibited most non-compete agreements, and others, like Illinois and Washington, have implemented significant restrictions.
Employers should seize this opportunity to conduct a thorough review of their non-competition, non-solicitation, and other post-employment restrictions with the help of experienced counsel. This review should ensure compliance with applicable state laws, which may vary based on where employees are located rather than where the company is headquartered or incorporated. Additionally, companies should monitor further legal developments closely, as the situation could change if the court’s decision is appealed.
For personalized guidance on how these developments impact your company and assistance with reviewing your employment agreements, please contact Catherine Edmunds at catherine@edmundslegal.com.
This communication is provided as a service to our clients and friends and is for informational purposes only. It is not intended to create an attorney-client relationship or constitute an advertisement, a solicitation, or professional advice as to any particular situation.