In a recent decision, the United States District Court for the Northern District of Texas blocked a rule by the Federal Trade Commission (“FTC”) seeking to make most non-compete agreements unenforceable. The court’s order set aside the FTC’s rule which was set to take effect on September 4, 2024. The court’s ruling allows employers to enforce existing non-compete agreements and create new ones. However, the legal process surrounding non-competes is far from over.
Background
Over the past several years the FTC increased its interest in the effects of non-competition agreements on employee job mobility. On May 7, 2024, the FTC issued a Final Rule (the “Rule”) effectively banning enforcement of non-competition agreements (or anything that “functions” as a non-compete) except in very limited situations. For example, the Rule excepted agreements involving a bona fide sale of a business and existing agreements with “senior executives.” The FTC acknowledged the Rule’s impacts would be far reaching, indicating that nearly 1 in 5 American workers were subject to a non-compete agreement and that very few workers were likely to qualify for the “senior executive” exception.
Immediate Impacts
The court’s decision to set aside the Rule has several significant implications for employers:
- Continued Use of Non-Compete Agreements: The Rule will not take effect on September 4, 2024. However, this is likely not the last time you’ll hear about the Rule, as employers will have to wait for the appeals process to play out, which could take months (if not years). In the meantime, employers can continue to use non-compete agreements to protect their business interests, provided these agreements comply with state law and are reasonable in scope and duration.
- No Notice Necessary at this Time: The Rule required employers to notify employees that their non-competition agreement was unenforceable. The court’s order setting aside the Rule means employers are no longer required to send the anticipated notice prior to September 4.
Action Steps for Employers
- Review Existing Agreements Protecting Your Business: Employers should review and update existing agreements to ensure adequate, enforceable protections are in place. In addition to non-competition agreements, many other agreements are available to protect employer interests, such as non-solicitation, confidentiality, intellectual property, trade secrets, conflict of interests, and duty of loyalty provisions. Together these provisions can serve to protect valuable information and relationships. The Labor & Employment Law Practice Group at Woods Aitken can assist with reviewing and developing the right protections for your business.
- Employee Retention Strategies / Creating a Healthy Workplace Culture: Employers should work to develop a strong workplace culture that encourages employees to fully engage in the mission of the organization. Key employees who feel valued and connected to their work provide stability for long-term business success. Open communication, opportunities for professional development, and recognition of achievements all create a supportive work environment. Our Labor & Employment Law Practice Group routinely works with employers to counsel them on assessing and approving workplace culture.
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