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The FTC’s Noncompete Rule is Not Going into Effect on September 4, Rules Texas Federal Court Judge
The Federal Trade Commission’s (FTC) nationwide rule banning noncompete agreements between most employers and employees will not go into effect as scheduled on September 4, 2024, Judge Ada Brown, a federal court judge in the Northern District of Texas, ruled on August 20, 2024.
What is the FTC’s Noncompete Ban?
The FTC used its rule-making authority to publish a final rule on April 23, 2024, which would have effectively banned almost all noncompete agreements between almost all employers and their employees in the United States. The rule defined noncompete agreements as terms or conditions of employment that either prohibit a worker from, penalize a worker for, or function to prevent a worker from either seeking or accepting work in the United States with a different person, or operating a business in the United States after the conclusion of their current employment. The rule prohibited employers from entering into any new noncompete agreements (except with senior executives with policy-making authority) and also made the majority of existing noncompete agreements unenforceable. Under the rule, employers were required to prepare and deliver notice to all employees with whom the employer had an existing noncompete agreement that the noncompete agreement was no longer enforceable by the employer before September 4, 2024, when the final rule was set to go into effect.
Why is the Noncompete Ban Not Becoming Enforceable?
Immediately after the final rule was published in April 2024, plaintiff-employers filed lawsuits all over the country to challenge the FTC’s authority to regulate employers’ ability to contract with employees to prevent employees from unfair competition. U.S. District Courts in Texas and Florida found that the plaintiffs were likely to succeed on the merits and issued preliminary injunctions preventing the FTC from enforcing its rule against the plaintiffs in those cases, while a U.S. District Court in Pennsylvania declined to issue an injunction in favor of plaintiff, finding that the FTC was likely to succeed on the merits. Judge Ada Brown of the Northern District of Texas was the first to issue a decision on the merits.
On August 20, 2024, Judge Brown granted the Plaintiff’s motion for summary judgment finding the FTC lacked the power to issue the noncompete ban. The Court ruled the FTC was only authorized by Congress to issue procedural rules and the noncompete ban was more akin to a substantive rule. Further, Judge Brown opined that the FTC’s noncompete ban was unlawful because it was unreasonably overbroad, had a one-size-fits-all approach and failed to address potential alternatives rather than a blanket nationwide noncompete ban. Most importantly for employers in Michigan and Ohio, Judge Brown rejected the FTC’s argument that relief should be limited to only the named plaintiffs in the suit and found setting aside agency action has nationwide effect. Accordingly, the rule will not be enforced and will not otherwise take effect on September 4, 2024.
What Happens Next?
While this was a significant win for employers who no longer need to prepare and deliver notices to employees with existing non-competes and employers can still enter new non-competes that comply with state law, employers and their counsel still may need to monitor challenges to the rule. The FTC has a right to appeal Judge Brown’s decision to the Fifth Circuit Court of Appeals until September 19, 2024, and there will likely be additional decisions and appeals in the Florida and Pennsylvania cases. The United States Supreme Court may ultimately decide the matter of whether the FTC’s nationwide noncompete ban is enforceable.
For now, state law will continue to control whether noncompete agreements are enforceable. Ohio employers still may enforce their noncompete agreements as long as the noncompete agreements meet other requirements of Ohio law including reasonable duration and reasonable territorial limits. Similarly, Michigan employers also may enforce their noncompete agreements as long as the noncompete agreement meets other requirements of Michigan law including reasonable duration, reasonable territorial limits, and applies to a reasonable type of employment or line of business. Ohio and Michigan employers should consider reviewing their current noncompete agreements and creating an inventory of all noncompete agreements that bind both former and current employees. Even if the noncompete ban never takes effect, the inventory will be an efficient tool to enforce and track noncompete agreements in the future.
If you have any questions regarding the noncompete ban or whether your business’ noncompete agreements are enforceable under Ohio and/or Michigan law, please contact Ms. Urrutia, Ms. Hartman, Ms. Robinson, or Mr. Walton.
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Disclaimer: This alert has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.