As previously reported by Erickson Sederstrom, earlier this year, the Federal Trade Commission (FTC) issued a landmark rule intended to ban non-compete agreements nationwide for employees and independent contractors. However, a federal court in Texas has now invalidated the rule, with a ruling that applies nationwide. As a result, the FTC Rule will not take effect unless a higher court overturns this decision on appeal.
A Look at the History of the FTC’s Non-Compete Rule
Non-compete agreements have long been a common tool for employers to protect trade secrets, client relationships, and other business interests. They restrict employees from joining a competitor or starting a competing business for a set period after leaving a company. While widely used, these agreements have also been criticized for limiting workers' mobility and bargaining power.
In January 2023, the FTC announced its plan to ban nearly all non-compete agreements, citing concerns that such agreements suppress wages, stifle competition, and limit entrepreneurial opportunities. The proposed rule, commonly referred to as the "FTC Rule," was part of a broader effort by the Biden administration to promote competition across various sectors of the economy.
The rule’s primary provisions included:
Prohibition on New Non-Competes: Employers, including independent contractors, would be banned from entering into non-compete agreements with workers.
Invalidation of Existing Agreements: Pre-existing non-competes would be rendered unenforceable, and employers would be required to notify affected workers.
Legal Challenges and Rulings
The FTC’s regulation immediately sparked controversy and led to legal challenges from various business groups, which argued that the agency lacked the authority to regulate non-compete agreements in this manner. Legal battles followed, with federal courts taking different approaches:
Pennsylvania: A federal court denied a motion to block the rule, indicating that the FTC might have authority over it.
Texas & Florida: Federal courts in these states ruled that the FTC Rule exceeded the agency's authority, but only applied their rulings to the plaintiffs involved in those cases.
However, the recent Texas federal court ruling invalidates the FTC Rule on a national scale. The court determined that the FTC had overstepped its regulatory power, citing statutory limits on the agency’s authority.
Next Steps for Employers
Many employers have been actively preparing for the rule's implementation, reviewing their employment agreements, and exploring alternative approaches to protecting their business interests without relying on non-competes. Given the complexity of this situation, we encourage employers to consult legal counsel to assess the current status of their non-compete agreements and explore other options to safeguard proprietary information, customer relationships, and business strategies.