On May 7, 2024, the Federal Trade Commission (FTC) made headlines by passing a new rule that aims to ban most non-compete agreements. This move is part of a broader effort to promote fair competition and protect workers’ rights. However, due in large part to news outlets inaccurately understanding and reporting on the rulemaking process, the initial excitement surrounding this announcement has led to confusion and legal complications, as many employees mistakenly believed that non-compete agreements were banned as of that date. In this post, we will explore the details of the FTC’s rule, the history and process of rulemaking, the current state of the law, and provide some helpful clarifications.
Understanding the FTC’s Rule
The FTC’s new rule targets non-compete clauses, which are contractual agreements that restrict employees from working for competitors or starting a competing business within a certain period after leaving a job. These clauses are common in various industries and are often justified as a means to protect trade secrets and investment in employee training. However, critics argue that non-competes stifle competition, limit worker mobility, and suppress wages.
The FTC’s rule prohibits employers from establishing or enforcing noncompete clauses with U.S. workers, allowing only limited exceptions. These exceptions apply to current agreements with senior executives, noncompetes related to the sale of a business, and causes of action that arise before the rule takes effect on September 4, 2024.
The Rulemaking Process: A Four-Month Grace Period
One critical aspect of the rulemaking process that many people overlook is the mandatory four-month grace period before a new rule becomes effective. That means that even though the FTC passed the rule on May 7, it will not become effective or binding until September 4. This period allows stakeholders, including businesses and advocacy groups, to voice their concerns and potentially challenge the rule in court. The grace period is designed to ensure that the rule is thoroughly vetted and that its implications are fully understood before it takes effect.
Indeed, several entities did challenge the FTC’s rule in various courts. The first lawsuit was filed by the tax firm Ryan LLC in the U.S. District Court for the Northern District of Texas. The United States Chamber of Commerce also filed a lawsuit in the same court, but it was paused pending the outcome of the Ryan LLC case. The challenges seek to generally stay the enforcement of the rule, meaning prohibiting it from going into effect.
On June 13, Judge Ada E. Brown announced that a hearing on Ryan LLC’s request for injunctive relief was unnecessary and that a decision on the motion for a preliminary injunction would be made by July 3. This decision will provide some clarity to employers before the new regulations are scheduled to take effect in September.
The Current State of the Law
As of now, the FTC’s rule banning most non-compete agreements is not yet in effect. This means that existing non-compete agreements remain legally enforceable, and employees who violate these agreements could still face legal action.
Upcoming Clarifications
Until we see what happens with the judicial challenges to the rule, both employers and employees must stay informed and seek legal counsel if they have questions about their rights and obligations under current non-compete agreements.
Conclusion
The FTC’s ban on non-compete agreements represents a shift in employment law, aiming to enhance worker mobility and promote fair competition. We will provide an update following the July 3 decision in the Ryan litigation. Even once a decision is issued, appeals are almost guaranteed so a final answer on this issue is unlikely to come any time soon. We will keep you updated.
