A Federal Court Enjoins Enforcement of the FTC’s New Rule Banning Noncompetition Agreements
The noncompetition roller coaster continues to roll on its up-and-down course. As most employers are aware, noncompetition covenants have been disfavored in the law for a long time. A couple of the primary reasons are that they adversely impact an individual’s ability to earn a living and they limit labor markets. Nevertheless, they were traditionally enforced in most jurisdictions as long as they were in place for a legitimate business purpose and were narrowly tailored to achieve that purpose.
At some point, states and other authorities began to enact legislation to limit or, in some cases, ban non-competition covenants. Some states, such as California, Oklahoma, and Minnesota, have passed bans on noncompetes. Utah has not enacted an outright ban, but it has placed various limitations on non-competition covenants, including a one-year cap on such covenants.
Then, as discussed below, the Federal Trade Commission (FTC) promulgated a rule banning noncompetition covenants nationwide in 2024. But the implementation and enforcement of that rule has now been placed on hold. A federal district court issued an interim order barring the implementation of the FTC’s noncompetition ban. There are also a few other pending lawsuits challenging the FTC’s rule. It will be interesting to see how these lawsuits impact the FTC’s rule and whether the noncompetition roller coaster will continue.
A Federal Court Enjoins the FTC’s New Rule on Noncompetition Agreements
On April 23, 2024, the FTC issued a final rule banning most noncompetition agreements nationwide. That rule is more fully described below and was to become effective on September 4, 2024.
However, on July 3, 2024, the United States District Court for the Northern District of Texas in the lawsuit Ryan LLC v. Federal Trade Commission, issued an order temporarily prohibiting the implementation or enforcement of the FTC’s noncompetition ban. Strictly construed, the judicial ban (called an injunction) applies only to the plaintiffs in that lawsuit. The ruling is only preliminary as it lasts until the court ultimately decides whether the FTC’s rule should be permanently banned. At that point, the court would decide whether to let its injunction lapse or whether to make it “permanent.”
In its ruling, the court concluded that the FTC lacked the authority to enact the noncompetition covenant ban. The court added that even if the FTC had such broad rulemaking authority, then the rule was “arbitrary and capricious,” rendering the rule invalid.
The FTC’s Noncompetition Ban
The issued rule prohibits all new noncompetition covenants and prohibits the enforcement of most existing agreements. The rule requires employers to notify workers subject to noncompetition covenants that the agreement will not be enforced against the worker in the future. The FTC also put in place mechanisms for enforcement of the final rule.
There are some exceptions to a total ban. Under the final rule, existing noncompetition covenants can remain in place for senior executives. According to the rule, senior executives are defined as workers in policymaking positions who earn over $151,164 per year. But employers cannot enter or enforce new noncompetition covenants with senior executives. In addition, the rule does not apply to noncompetes tied to the sale of a business or to franchisees. Although it is unclear, owners may be covered by this exception.
The rule does not apply to businesses that are exempt from the FTC’s jurisdiction. Specifically, the FTC Act exempts banks, savings and loan associations, credit unions, air carriers, common carriers, firms governed by the Packers and Stockyards Act, and nonprofits are not subject to the FTC’s jurisdiction. As such, it is unlikely that the rule extends to such businesses.
The Future of Noncompetition Agreements
The federal court’s injunction has, to say the least, caused uncertainty as to the enforceability of the thousands of noncompetition covenants in place. The fact that the injunction bars implementation of the rule as to the plaintiffs only makes it unclear whether the ban will apply to the balance of noncompetition covenants across the country on September 4, 2024. It is unclear whether the FTC will proceed with implementing it and enforcing it for others. Further, it is unclear whether the court’s order will only be a temporary roadblock to the implementation of the rule or whether the court will permanently prohibit the rule.
Moreover, it is unclear how other challenges to the rule may fare. Other challenges to the rule are currently pending in at least Pennsylvania and the Eastern District of Texas. It seems that the only thing certain about the future of noncompetition agreements is that the future is uncertain. Employers that use noncompetition covenants should monitor these cases. It is time to bucket up for the next ride on the noncompetition covenant roller coaster.
