The FTC non-compete ban is in limbo — here's what that means for employers

The Federal Trade Commission's non-compete rule is set to go into effect Sept. 4, placing a comprehensive ban on non-compete clauses for employees across the U.S. But after recent federal court rulings, there are doubts about whether the rule will ever go into effect.

Earlier this month, a Texas federal judge ruled that the FTC did not have the authority to enact its non-compete ban, and issued an injunction that applies only to the affected parties in the case. In other words, the FTC cannot enforce the rule on Ryan LLC, a tax service provider based in Dallas, and the plaintiffs in this case. Meanwhile, a Pennsylvania federal judge released a contrary ruling on the ban just last week, stating that the FTC does have the power to ban practices that harm competition and innovation. 

What does this mean for employers who are preparing to comply with the ban? Bryan Starrett, partner and employment lawyer with Brooks Pierce, advises companies to monitor court cases and continue prepping. 

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"The key takeaway from these cases is that the enforceability of the final rule is still very much in limbo, with courts disagreeing as to whether the Final Rule is lawful," says Starrett. "Unless a court finds that implementation of the final rule should be halted nationwide, employers should be prepared to comply with it by the effective date of Sept. 4, 2024."

Starrett stresses that the Texas case did not result in an injunction on a state, let alone a national level. Additionally, the Pennsylvania case did not address Texas' earlier ruling. This furthers the sense of uncertainty around whether the ban will survive the slew of court cases it's likely to face. 

Before the FTC proposed the ban, restrictions around non-competes were a state-level issue. However, the FTC believes a national standard on non-competes will ultimately be better for businesses and the economy: the FTC estimates the ban will lead to as much as 29,000 more patents each year, 8,500 new businesses each year and a $524 increase in employee earnings. 

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"Even on a state level, there's been a slight evolution in the last five to 10 years, with some states reining in the scope of permitted non-competes," says Starrett. "Even if the FTC rule doesn't stand, if you want to enforce your non-compete, you may have to go to court and convince a judge and a jury. You might be operating in an environment less employer-friendly than it used to be just because of the news and the sentiments floating out there about this topic."

The final rule applies to all new hires, including senior executives; existing non-compete agreements are deemed void on Sept. 4 for all current employees, with the exception of senior executives. Starrett encourages employers to take stock of their current non-compete agreements and identify which ones are no longer enforceable in the next month. 

"The FTC rule doesn't just ban non-competes — it actually affirmatively requires employers to issue a written notice to employees with non-competes, informing them about the unenforceability," he says. "Know who has a non-compete and who has to get this notice."

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Starrett notes that other restrictive covenants like confidentiality, non-disclosure and  non-solicitation provisions are not banned, and these can potentially help employers protect themselves against competitors. 

"For now, employers should continue to monitor updates from the courts on the status of the Final Rule," says Starrett. "Ask, 'Do I have other restrictive covenants in my agreements that give me some comfort and confidence in my trade secrets and in my client and employee relationships?'"