On August 20, 2024, a United States District Court in Texas struck down the U.S. Federal Trade Commission’s (FTC) rule banning most non-compete clauses (16 C.F.R. § 910.1-.6) (Non-Compete Rule). The Court held the Non-Compete Rule is unlawful and, as such, is set aside. The decision effectively blocks the Non-Compete Rule from going into effect on September 4, 2024.
Additional Background
As we shared in a previous article, the FTC published the Non-Compete Rule in April 2024. If the Non-Compete Rule went into effect as planned on September 4, 2024, it would have effectively banned existing and future non-compete clauses in agreements with a broad group of workers, with limited exceptions.
Since its publication, the Non-Compete Rule has been subject to numerous legal challenges, including the case brought against the FTC in the United States District Court for the Northern District of Texas, Dallas (Court), that lead to the August 20, 2024 decision setting aside the Non-Compete Rule. The Court granted summary judgment to the plaintiffs who challenged the Non-Compete Rule and held:
- The FTC lacks statutory authority to promulgate the Non-Compete Rule;
- The Non-Compete Rule is arbitrary and capricious;
- The Court must “hold unlawful” and “set aside” the Non-Compete Rule;
- The Non-Compete Rule “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter;” and
- The Court’s decision has nationwide effect.
Impact of This Decision
The FTC may appeal, but for now:
- Existing non-compete clauses will not be invalidated by virtue of the Non-Compete Rule.
- Employers do not need to notify workers that their non-compete clauses are unenforceable, as the Non-Compete Rule required.
- Employers may continue to use non-compete clauses and other restrictive covenants, including in employment and equity-related documents; however, these provisions must continue to comply with applicable state laws.
Take-Aways
Though most businesses were waiting to issue notices rescinding their non-compete clauses, as required by the Non-Compete Rule, until its September 4, 2024 effective date, those that did should contact legal counsel to discuss their options.
It is also important for businesses to keep in mind that restrictive covenants will continue to be scrutinized by courts. As we have previously highlighted, there has been a nationwide trend of increased resistance to non-compete clauses by courts, and several states have banned their use (e.g., California, Minnesota, North Dakota and Oklahoma) or limited their use (e.g., Colorado, Illinois and Washington). As such, it is important to work with legal counsel when drafting or seeking to enforce such provisions.
For more information on this topic, or to learn how Godfrey & Kahn can help, contact a member of our Non-Compete & Trade Secrets practice.