Earlier this year, the Federal Trade Commission (FTC) issued a final version of its proposed Noncompete Clause Rule (FTC Noncompete Rule), which, with limited exceptions, generally prohibits noncompete clauses with employees. Barring intervention by the courts, the effective date of the FTC Noncompete Rule is September 4, 2024.
More specifically, with the exception of a carve-out in the rule for existing noncompetes with senior executives, the FTC Noncompete Rule adopts a comprehensive ban on new noncompetes, and existing noncompetes would no longer be effective after the rule’s effective date.
The FTC Noncompete Rule quickly sparked multiple lawsuits to prevent it from taking effect, with the main argument being that the FTC does not have the authority to impose such an overarching rule. The first case filed against the FTC was in the United States District Court for the Northern District of Texas. One day later, a second case was filed by the United States Chamber of Commerce in the Eastern District of Texas, which was stayed in view of the previously filed case in the Northern District.
On July 3, 2024, the judge in the Northern District of Texas case issued a preliminary injunction that prevents the FTC Noncompete Rule from taking effect but only against the plaintiffs in that lawsuit.
While seeming to suggest that the regulation should be shot down, the judge denied issuing a nationwide injunction. The limited preliminary injunction will remain in place while the court considers whether the FTC had the authority to issue the FTC Noncompete Rule. The judge indicated an intention to rule on the ultimate merits of the action by August 30, 2024.
In yet another case involving the FTC Noncompete Rule, which was filed in the Eastern District of Pennsylvania, oral argument was held on July 10, 2024, and the judge in that case is expected to issue a decision on the preliminary injunction motion by July 23, 2024.
In view of the Northern District of Texas court’s injunction, combined with the recent United States Supreme Court ruling in Loper Bright Enterprises v. Raimondo,i which overturned deference to federal agency rulemaking, it seems unlikely that the FTC Noncompete Rule will ultimately stand; however, the death knell has not yet been rung, and employers should continue to monitor developments with the pending cases as well as developments in states in which they operate, where legislative prohibitions and the regulation of noncompetition agreements continues to heat up.
If you have questions regarding the content of this alert, please contact Bob Heary, Labor & Employment Practice Area chair, at rheary@barclaydamon.com; Sierra Leitten, summer associate, at sleitten@barclaydamon.com; or another member of the firm’s Labor & Employment Practice Area.
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i603 U.S. ___ (2024).