Update: What To Do About Noncompete Agreements

The Federal Trade Commission (FTC) published a final rule earlier this year that banned noncompete agreements.? The final rule was effective on September 4, 2024.

Requirements of the rule included:

• A ban on new noncompete agreements with all workers, including senior executives
• Existing noncompete agreements could remain in force for senior executives if: (1) they make more than $151,164 per year; including salary, commissions, performance bonuses; but not including benefits, board, and lodging and (2) senior executives have authority to make policy decisions for the entire company
• Existing noncompete agreements with workers other than senior executives are unenforceable after the rule is effective.

There are several exceptions to the rule.

In early July, a federal court in Texas granted a preliminary injunction that delayed the effective date of the final rule.? The Court declined to issue a nationwide injunction [See Ryan LLC v. Federal Trade Comm’n, No. 3:24-CV-00986-E (N.D. Tex. July 3, 2024)].

Then, on August 20, 2024, the Judge issued an order in the Ryan case that included a nationwide prohibition on implementation of the FTC rule.? The basis of this decision is that the FTC does not have authority to order a ban and that the rule was arbitrary and capricious.? Based on this ruling, employers may continue to enter into and enforce non-compete agreements with workers.? A decision in this case is still pending.

What is the current status of non-compete agreements?

First, state legislatures have enacted restrictions on use of noncompete agreements.? As of August 21, 2024, four states ban the use of noncompete agreements and thirty-three states plus the District of Columbia restrict the use of these agreements.

Providers must comply with applicable requirements in every state in which they conduct business.? Providers who fail to do so risk enforcement action.?

In addition, it is important to note that the FTC’s authority to identify anti-competitive activity and take enforcement action in specific cases is still in force.? The FTC continues to claim that noncompete agreements are “unfair methods of competition.”? Noncompete agreements may, therefore, violate Section 5 of the Federal Trade Commission (FTC) Act. The Act specifically bans “unfair methods of competition” and “unfair or deceptive acts or practices.”

The FTC and Department of Justice also have the power to prosecute unlawful noncompetes under the Sherman Antitrust Act.? The Act “makes conspiracies to restrain trade felonies subject to significant penalties, including fines up to $100 million or up to 10 years in prison.”

Although the FTC and DOJ have not used the Sherman Antitrust Act regarding noncompete agreements, the Departments have taken criminal enforcement action against employers who entered into so-called “no-poach” or wage-fixing agreements with each other. They have also challenged the use of noncomplete agreements as anti-competitive monopolization.?

Since the FTC has been stymied in its efforts to regulate noncompete agreements, at least for the moment, enforcement action under the statutes described above may be more likely.

The current “bottom line” is that the FTC rule banning noncompete agreements is not in effect, but providers must comply with applicable state and federal requirements or risk enforcement action.? There will undoubtedly be more chapters to this saga!

?2024 Elizabeth E. Hogue, Esq.? All rights reserved.

No portion of this material may be duplicated by any means without the advance written permission of the author.