What Happened to the FTC Ban on Non-Compete Agreements? Banned Or Not Banned?

✨Not banned.

✨Non-compete agreements are alive and well.

✨Here’s what happened:

🌍The basic issue:

A non-compete agreement is often presented to an onboarding employee and basically prohibits the employee from competing with the company after working there. There are limitations to a non-compete such as casting too wide a net geographically or timewise. For instance, an agreement that basically cuts off the ability of the employee to work in the same field would likely be overbroad. An agreement not to compete also often includes an agreement not to solicit customers of the company and not to disclose proprietary information of a company, such as a trade secret.

Properly crafted, these agreements make sense. However, the agreements are typically written by the company on a “take it or leave it” basis for employees and are rarely negotiated. As you can imagine, agreements can be quite lopsided and hold an employee in check beyond what’s reasonable. The interpretation of these agreements vary from state to state and case-by-case.

Therein lies the issue: who usually has financial resources to get a green light or red light court decision, even when the agreement is written like dog or cut and pasted from a random online source?

Company – yes. Employee – no.

🌍Enter FTC:

The #FTC issued a rule, that was to take effect September 4, 2024, banning a great swath of non-compete agreements. Except in limited circumstances, the rule voided existing non-compete agreements and prohibited future non-competes. The rule left intact agreements not to solicit customers and not to disclose company proprietary/confidential information. It makes sense that an employee may start her own business or work for a competitor, even close by, as long as the employee isn’t courting customers or sharing or using confidential information she learned while working at her previous employer. However, the honest long and short of it is that employers mostly don’t trust employees to go work at a competitor and NOT court customers or share company information.

🌍Where we are today:

From the time of its announcement, the FTC rule has been contested, detested and now, for the time being, court tested. A Texas federal court in ryan_llc_v_federal_trade_commission_ruling_usdc_texas_northern.pdf (courthousenews.com) issued a decision on August 20, 2024, that effectively killed the rule from taking effect anywhere in the United States (not just Texas).

The court held that the FTC doesn’t have authority to make substantive rules about unfair methods of competition, like the one that bans non-compete agreements, and that the FTC’s rule is arbitrary and capricious. Because the court’s opinion was not just about the particular company that filed suit but instead went to the heart of whether the FTC had the authority to make the rule under any circumstance (which affected persons in all judicial districts equally), the court set aside the rule from taking effect period.

🌍Now what:

The FTC may appeal the ruling of the Texas court – we will see. If so, that will take some time – wheels turn slowly. In the meantime, employers may rely on the Ryan court decision and carry on with non-competes as usual. Logical note: no random cutting/pasting from the internet, think about realistic parameters, and read it aloud before asking anyone to sign it.

Disclaimer: The aim of this article is to provide high level information and is not provided as a substitute for legal advice.