You may have seen alerts from professional colleagues advising employers to take action regarding the pending Federal Trade Commission (FTC) rule on non-compete agreements, originally set to take effect on September 4th. However, the United States District Court for the Northern District of Texas recently blocked the rule, ruling that the FTC lacks the authority to implement such a broad regulation. A spokesperson for the FTC has indicated that they may appeal this decision, but for now, the rule's implementation is halted, allowing employers to continue using and enforcing non-compete agreements. The FTC retains the authority to challenge non-compete agreements on a case-by-case basis as violations of federal competition law. The original alert is included below.
While the situation regarding non-compete agreements remains uncertain, employers should still prepare for the possibility that the ban could take effect on September 4, 2024, 120 days after the FTC issued its final ruling.
In April of this year, the FTC banned non-compete clauses for most employees. Despite this, the ruling has faced two legal challenges with differing outcomes. In July, a Pennsylvania court denied an employer’s request to temporarily block the rule. However, later that month, a Texas court issued a preliminary injunction, temporarily halting the rule's enforcement. Importantly, no nationwide injunction blocking the rule has been issued.
The Texas court has indicated that it will issue its final ruling by August 30, 2024. It is possible that the rule could still be struck down, preventing its enforcement nationwide before the aforementioned September 4th effective date.
Non-compete agreements typically impose contractual conditions that restrict workers from taking new jobs or starting their own businesses. The FTC views non-competes as an unfair method of competition, in violation of Section 5 of the FTC Act.
Under the FTC’s new rule, existing non-compete agreements for senior executives can remain in force, but new non-competes for any employees, including senior executives, will be banned and deemed unenforceable. Senior executives are defined as employees earning more than $151,164 annually and who hold policy-making positions.
Employers will be required to notify employees, other than senior executives, who are currently bound by non-compete agreements that these agreements will no longer be enforced. The FTC has provided model language in the final rule that employers can use for this communication. The sample language can be viewed here: https://www.ftc.gov/legal-library/browse/rules/noncompete-rule
Employers can still protect their investments through alternative means. Non-disclosure agreements (NDAs) and trade secret laws remain effective tools for safeguarding proprietary and other sensitive information.
What Should Employers Do?
· Review existing non-competes: Determine whether any agreements will still be enforceable after the final rule takes effect (for senior executives).
· Notify affected employees: Inform employees previously bound by non-competes that these agreements will no longer be enforced.
· Update NDAs and confidentiality agreements: Ensure these documents are robust enough to protect trade secrets and sensitive proprietary information.
Need assistance or more information?
Contact Jeffrey N. Lowe or Phoenix Anshutz with the Penner Lowe Law Group, LLC at 316- 847-8847.
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