Federal Trade Commission Noncompete Rule

Federal Trade Commission Noncompete Rule: What Employers Need to Know.

You may have recently seen alerts from professional colleagues urging employers to take action regarding the Federal Trade Commission Noncompete Rule, which was originally scheduled to take effect on September 4, 2024. However, the rule is currently on hold following a recent court decision.

The United States District Court for the Northern District of Texas has blocked enforcement of the Federal Trade Commission noncompete rule, finding that the FTC likely exceeded its authority by issuing such a broad regulation. While an FTC spokesperson has indicated that the agency may appeal the decision, the rule is not currently in effect, and employers may continue using and enforcing non-compete agreements for now.

Importantly, even though the FTC noncompete rule has been paused, the FTC still retains authority to challenge non-compete agreements on a case-by-case basis under federal competition law. The original employer alert is included below for reference.

Ongoing Legal Uncertainty Around the FTC Noncompete Rule

Although enforcement of the Federal Trade Commission Noncompete Rule is currently halted, employers should continue preparing for the possibility that the rule could ultimately take effect. If upheld, the ban would apply 120 days after the FTC’s final ruling, placing the effective date at September 4, 2024.

In April, the FTC issued its final rule banning most non-compete clauses for employees. Since then, the rule has faced two major legal challenges with different outcomes:

• In July, a federal court in Pennsylvania declined to temporarily block the rule.

• Later that month, a federal court in Texas issued a preliminary injunction, halting enforcement of the FTC noncompete rule.

At this time, no nationwide injunction is in place. The Texas court has stated it will issue a final ruling by August 30, 2024, leaving open the possibility that the rule could be struck down before its anticipated effective date.

What the Federal Trade Commission Noncompete Rule Would Do

Non-compete agreements generally restrict workers from accepting new employment or starting competing businesses after leaving a job. The FTC considers these agreements an unfair method of competition under Section 5 of the FTC Act.

Under the Federal Trade Commission noncompete rule:

• Existing non-compete agreements for senior executives may remain enforceable.

• New non-compete agreements would be banned for all employees, including senior executives.

• Senior executives are defined as employees who:

  • Earn more than $151,164 annually, and

  • Hold policy-making authority within the organization.

Employers would also be required to notify non-senior executive employees that their existing non-compete agreements will no longer be enforced. The FTC has provided model notification language, which can be found on the FTC’s website.

Alternatives to Non-Compete Agreements

Even if the FTC noncompete rule ultimately takes effect, employers are not without options. Businesses may continue to protect their interests through:

• Non-disclosure agreements (NDAs)

• Confidentiality agreements

• Trade secret protections under state and federal law

These tools remain valid and effective for safeguarding proprietary information and business relationships.

What Should Employers Do Now?

Given the uncertainty surrounding the Federal Trade Commission Noncompete Rule, employers should consider taking the following steps:

• Review existing non-compete agreements to determine which may remain enforceable if the rule takes effect.

• Prepare employee notifications for non-senior executives if enforcement resumes.

• Update NDAs and confidentiality agreements to ensure adequate protection of sensitive and proprietary information.

• Monitor ongoing court rulings that may impact enforcement of the FTC noncompete rule.

Questions About the Federal Trade Commission Noncompete Rule?

If you need guidance on how the Federal Trade Commission Noncompete Rule may impact your business, or assistance reviewing your existing agreements, contact Jeffrey N. Lowe or Phoenix Anshutz with Penner Lowe Law Group, LLC at 316-847-8847.