What Is the Status of Non-Compete Agreement in the US?

The Federal Trade Commission (“FTC”) issued its Non-Compete Clause Rule (the “Final Rule”) on April 23, 2024, prohibiting employers from enforcing non-competition agreements against employees and Independent Contractors. Employers and employees alike have been waiting to see whether the Final Rule would withstand the immediate and numerous legal challenges seeking to enjoin enforcement of the rule in advance of its effective date, September 4, 2024.

What would the Final Rule prohibit?

In essence, the Final Rule would broadly prohibit employers from enforcing non-competition agreements against their employees, as well as against independent contractors, with only a few exceptions. Existing non-competition agreements would become unenforceable as of the effective date, and it would be unlawful for employers to impose new non-competition agreements against existing or prospective employees. The Final Rule also requires employers to provide notice to those works with existing non-competition agreements that they will not be legally enforced.

Who would be exempt from the Final Rule?

The Final Rule contains two carveouts against whom non-competition agreements may be enforced. The first applies to “senior executives,” which are defined as individuals in a policy-making position who made more than $151,164 (or the equivalent if employed for less than a year) in the previous year. The second exception applies to bona fide sales of businesses, whereby a non-competition agreement against a person selling a business entity, his/her ownership interest in the business entity, or all or substantially all of the business entity’s assets.

The requirements of the Final Rule also do not apply where a cause of action related to a non-competition agreement accrued prior to the effective date.

What is the status of the challenges to the Final Rule?

The Final Rule has been challenged on several occasions, with a few particularly relevant, competing decisions. On July 3, 2024, the United States District Court for the Northern District of Texas in the matter of Ryan LLC v. FTC (“Ryan”) issued a preliminary injunction, staying the effective date and enforcement of the Final Rule as against the plaintiff tax services firm (and other intervening plaintiffs).

On the other hand, on July 23, 2024, the United States District Court for the Eastern District of Pennsylvania denied a plaintiff’s challenge to the Final Rule, concluding that the plaintiff failed to show a reasonable likelihood of success on the merits and irreparable harm. In this case, ATS Tree Services, LLC v. FTC, (“ATS”) the court found that the FTC is empowered to make and enforce the Final Rule as a way to prevent unfair methods of competition.

On August 14, 2024, the Middle District of Florida aligned with the Texas district court in granting a business’s request for a preliminary injunction against enforcement of the Final Rule in this specific instance. Similar to the Ryan court’s ruling on the preliminary injunction request, the Florida district court judge refused to apply the injunction beyond the circumstances and parties of the case before it.

Most recently, on August 20, 2024, the Northern District of Texas in Ryan granted the plaintiffs’ motion for summary judgment, while also denying the FTC’s cross-motion for summary judgment, holding that the FTC lacks statutory authority to promulgate the Final Rule. This decision purports to set aside the Final Rule with “nationwide effect,” prohibiting its enforcement or effectiveness on September 4, 2024.

The plaintiff in ATS has sought a stay of its case, including its upcoming summary judgment deadline, until the final resolution of the Ryan case, either on appeal, by virtue of the expiration of the FTC’s deadline to appeal, or otherwise.

What now?

It is unclear at the moment whether the FTC will appeal the Ryan decision to the United States Court of Appeals for the Fifth Circuit, though it is likely. Its deadline to do so is September 19, 2024, or 30 days from the date of the final judgment. Until then, the Ryan court’s nationwide ban should serve as a reprieve for employers seeking to enforce non-competition agreements. But cases like ATS remain ongoing, and could continue to cause confusion concerning the enforceability of the Final Rule until we get some sort of finality. Employers and employees alike may want to remain cautious and review their state’s laws when trying to enforce and/or violate non-competition agreements until a more definitive ruling is made, possibly from the United States Supreme Court.