The Federal Trade Commission’s (FTC) effort to impose a national ban on post-employment non-competition covenants with workers and invalidate existing non-competes has been defeated in federal court. As a result, non-competition covenants remain enforceable, subject to prevailing state law. Legally, employers are not required to take any action with respect to non-competes; but practically, employers will likely face increased resistance enforcing non-competes following the FTC’s efforts and continued efforts of states to ban or limit such covenants.
By way of background, the FTC formulated a two-pronged rule which was to take effect on September 4, 2024. The FTC’s rule banned virtually all employers from entering into, enforcing or attempting to enforce post-employment non-competition covenants with workers and also took the extraordinary measure of invalidating existing non-competes. The FTC provided exceptions for non-competition covenants entered into in connection with the sale of a business and grandfathered both existing non-competes with certain senior executives and causes of action regarding non-competition covenants that arose prior to the rule taking effect. Nevertheless, the scope of the FTC’s rule was unmistakably broad and spurred legal challenges.
One such challenge, brought by global tax services firm Ryan LLC, proved to be the FTC rule’s undoing. In Ryan LLC v. Federal Trade Commission, the U.S. District Court for the Northern District of Texas first granted the plaintiffs’ request for a preliminary injunction postponing the effective date of the FTC’s rule before ultimately rejecting the rule altogether. The Court held that “the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” Accordingly, the FTC’s rule was set aside and the Court directed that the rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, of thereafter.” In sum, the FTC’s rule banning non-competes failed to become law.
While employers no longer need to comply with the FTC’s rule by September 4, 2024, employers should continue to evaluate their use of non-competes. The defeat of the FTC rule may lead to increased legislation at the state levels, which poses challenges especially for those employers operating in multiple jurisdictions. In addition, state bans have typically targeted the use of non-competition agreements in specific industries or pertaining to specific types of workers, creating additional complexity for employers. For example, Connecticut has regulated non-competition covenants for security guards, broadcast employees, physicians and home health care, companion and homemaker employees.
Further, employers should anticipate that employees will have diminished regard for existing non-competes, assuming that such restrictions are simply unenforceable. Such a perception, although erroneous, places the onus on employers to remind employees of their continuing legal obligations to the employer and perhaps find opportunities for employees to reaffirm their obligations in writing.
Post-employment non-competition covenants with workers remain legal and enforceable despite the FTC’s efforts to establish a national rule prohibiting such covenants. Employers must continue their efforts to monitor changes at the state level and make strategic decisions concerning their use of non-competes, but without the urgency or broad scope imposed by the FTC rule. For more information, please contact Daniel B. Fitzgerald or another BW attorney.