On July 3, a federal court in Texas issued a preliminary ruling that invalidates the Federal Trade Commission’s (FTC) ban on noncompetes. This ruling and the upcoming effective date of the rule create additional significant uncertainty for employers. We have prepared the FAQ below to help you and your business navigate the decisions that need to be made regarding your noncompete agreements.
Remind me, what is the FTC’s noncompete rule?
In April 2024, the FTC issued a rule that broadly bans noncompetes. All new noncompetes are banned effective September 4, 2024. The rule also voids existing noncompetes with all employees except those who qualify as “senior executives.” The rule includes an exception for noncompetes entered in connection with the sale of a business.
So, what is this case in Texas about?
As expected, several lawsuits were filed challenging the FTC’s authority to issue the ban, as well as the FTC’s rationale for the ban. The plaintiffs asked the court to stay the effective date of the rule and to enjoin the FTC from enforcing the rule.
The judge found Congress did not give the FTC authority to make rules regarding noncompetes. She also found the FTC’s rule was arbitrary and capricious since it targeted all noncompetes, rather than just the harmful ones, such as those used with low-level employees lacking access to trade secrets or confidential information.
If my company uses noncompetes, will we benefit from this ruling?
Not at this time. This preliminary decision only applies to the parties to the case. The judge also declined to issue a nationwide injunction, which would have blocked the FTC from enforcing the rule against any employers. So, as things stand today, employers who are not parties to the case are technically obligated to comply with the rule. However, as a practical matter, the ruling creates serious doubts about the validity of the rule.
Was this a final ruling? Is the case over?
No, this was a preliminary ruling on whether to stay the effective date of the rule. The judge has not yet made a final decision on the rule’s validity. However, all signs point to her ultimately finding that the rule is invalid.
What’s next?
The judge said she will issue a final ruling on the merits by August 30, 2024. However, if she still does not issue a nationwide injunction, this ruling will only apply to the parties to the case. Her decision on the merits also will not bind other courts.
There is also litigation challenging the FTC’s rule in a federal court in Pennsylvania, where a ruling is expected in the next few weeks. Additionally, the FTC is expected to appeal the Texas judge’s final decision.
Given the possibility that there may not be definitive court guidance before the rule’s effective date, now is the time to reach out to legal counsel to determine your course of action.
What should my business do now? Isn’t the FTC requiring employers to give a notice to employees about noncompetes?
The rule requires employers to notify current and former employees that their noncompetes cannot be enforced. The notice must be provided by the effective date, which is September 4, 2024.
At this time, employers should prepare to send the notices, but they should seek guidance from counsel about the appropriate steps based on where they conduct business and the evolving status of the lawsuits challenging the rule.
BFV will continue to monitor the lawsuits challenging the FTC’s rule and keep you informed of any new developments. In the meantime, please feel free to contact us with any questions about how you or your business should proceed in light of the FTC’s rule and the pending cases.
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READ MORE:
BFV quoted in: “Takeaways From The FTC’s Noncompetes Ban,” Law360 (April 24, 2024 – subscription required)
Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.
Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.
