FTC's Game-Changing Ruling on Non-Compete Agreements

The Federal Trade Commission (FTC) recently issued a landmark rule that aims to ban non-compete agreements across the United States. This new rule is designed to promote competition and worker mobility, significantly impacting employers and employees alike.

NOTE: As of now, non-compete agreements are still enforceable as the FTC’s rule is facing multiple legal challenges.

What is a Non-Compete Agreement?

Employers use non-competes to protect trade secrets, maintain client relationships, and ensure a return on investment in employee training. Non-competes typically restrict employees from joining competitors or starting similar businesses within a certain geographic area and timeframe after leaving a job. These agreements are currently enforceable in most states, subject to varying degrees of scrutiny and limitations based on state laws.

What is the FTC's New Rule?

On April 23, 2024, the FTC issued a final rule that prohibits non-compete clauses in employment contracts. The rule is set to take effect 120 days after its publication in the Federal Register, meaning it could become enforceable later in 2024, depending on the outcome of legal challenges.

Key aspects of the FTC's rule include:

Prohibition of New Non-Competes: The rule bans employers from entering into new non-compete agreements with employees, including senior executives. Existing non-competes with senior executives will remain enforceable. Source: Federal Trade Commission
Exceptions: Certain entities, such as nonprofits, specific financial institutions, and businesses involved in the sale of a business, are exempt from the rule.
Preemption of State Laws: The rule preempts state laws that are less protective of workers but allows states to enforce more protective measures.

Legal Challenges and Uncertainty

The FTC's rule is not yet in effect and is currently being challenged in multiple lawsuits. Key arguments against the rule include:

FTC's Authority: Critics argue that the FTC lacks the authority to issue such a sweeping regulation and that it oversteps the commission's mandate under the FTC Act.
Major Questions Doctrine: Legal challenges cite the "major questions doctrine," which requires clear congressional authorization for significant regulatory actions by agencies.
Constitutional Concerns: There are also concerns about the rule's constitutionality and its potential to be deemed arbitrary and capricious.

The U.S. Chamber of Commerce and other business groups have already filed lawsuits seeking to block the rule. The outcomes of these legal battles will determine whether the rule takes effect as planned or faces delays and modifications.

Practical Implications for Employers

While the legal landscape remains uncertain, employers should prepare for the potential implementation of the FTC's rule by:

Reviewing Employment Contracts: Employers should examine their current non-compete agreements and consider alternative methods to protect their business interests, such as nondisclosure agreements (NDAs) and non-solicitation clauses.
Notifying Employees: If the rule is upheld, employers will need to notify affected employees that their non-compete agreements are no longer enforceable.
Monitoring Legal Developments: Stay informed about the ongoing legal challenges and be ready to adapt policies based on the final legal outcomes.

Until the legal challenges are resolved, non-competes remain enforceable in most contexts. If the FTC rule is upheld, it will take effect 120 days after its publication in the Federal Register, rendering non-compete agreements unenforceable from that date onward. If upheld, the FTC's new rule on non-compete agreements represents a significant shift in employment law aimed at enhancing worker freedom and promoting competition. Employers should seek legal counsel to navigate this evolving landscape and ensure compliance with both current and future regulations.

Contact Wheeler Legal for Assistance

Contact Wheeler Legal at (321) 209-5995 for assistance with this or any other business-related matter.

Disclaimer: The information contained in the above post is provided for general informational purposes only and does not constitute legal advice. It is not intended to create an attorney-client relationship. This firm aims to provide quality information, but we make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to this post. Nothing provided in these blog posts should be used as a substitute for the advice of competent counsel.