Federal Judge Rules the FTC’s Non-Compete Ban “Shall Not Be Enforced”

August 23, 2024 |

Commercial Litigation

Whether you are a business owner or an employee with a non-compete you have probably heard the term “non-compete” more in the last few months than in the last few years combined. In April 2024, national news was made when the Federal Trade Commission (“FTC”) established a new rule that invalidated existing non-compete agreements and prohibited employers from entering into non-compete agreements at all with few exceptions. Read more about that ruling here in our prior FTC vote blog.

You should expect to hear more in the coming weeks, as more developments have occurred and are expected in the coming months. With the Ruling slated to go into effect in early September, a Federal Judge recently ruled that the FTC cannot enforce its ban, leaving uncertainty about what may happen next.

What was the FTC’s April 2024 Ruling on Non-Competes?

The Federal Trade Commission adopted a rule to ban non-compete agreements. The new rule, which was set to go into effect on September 4, 2024, would invalidate existing non-compete agreements and would also prohibit employers from using non-compete agreements going forward. The FTC specifically exempted senior executives (executives who make over $151,164 annually and who are in policy-making positions) from this new rule.

What has been the Effect of the FTC Rule?

The fallout over the following months has led to confusion and misinterpretation among employers and employees alike. In recent months employees have left and refused to honor non-compete agreements leaving employers uncertain about whether to pursue legal remedies to enforce the non-compete agreement. Similarly, many employers have questioned whether to continue their normal practice of entering into non-competition agreements at all to protect their trade secrets and intellectual property.

What did the Federal Court Decision Say?

This issue was muddied earlier this week when Judge Ada Brown granted a motion for summary judgment in a case challenging the FTC’s rule in the United States District Court for the Northern District of Texas. Judge Brown held that “the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action.”

What Does This Mean for the FTC Ruling?

This case is one of a number of pending lawsuits that have challenged the FTC’s rule on non-competes. The other cases remain pending in Pennsylvania and Florida, with neither having reached a final conclusion at this time. After the Federal Court’s decision, a spokesperson for the FTC has been cited as saying that the FTC is not prevented from addressing non-competes on a “case-by-case” basis in individual actions. Additionally, the FTC may appeal the decision and this issue could ultimately end up in the United States Supreme Court.

Does This Decision Add Clarity for Employers Seeking to Protect Trade Secrets and Intellectual Property Through a Non-Compete Agreement?

Likely not. The FTC is expected to appeal Judge Brown’s decision to the Fifth Circuit Court of Appeals. Additionally, other challenges to the FTC’s rule are being decided in other courts across the United States. Lastly, even if the FTC rule is overturned, Ohio (and many other states) have their own common law relating to the validity and enforceability of non-compete agreements.

What Does This Mean for Ohio Employers and Employees?

Non-compete agreements are often critical to a company’s decisions in employment decisions, operational decisions, and how they protect their trade secrets and intellectual property from competitors. Especially with the recent decision from the Northern District of Texas, this is the time to seek legal advice to assist in evaluating whether your non-compete agreements are likely to be upheld if challenged, and to chart the best path forward while the FTC’s rule makes its way through the court system.

Whether you are an employer or an employee struggling with the issue of whether to utilize, agree to, or enforce a non-compete, we are here to help. Our commercial litigation and business transactions teams at Plakas Mannos have the experience, knowledge, and creativity to help you strategize your next steps. If you have questions about what to do for your business or as an employee in light of the uncertainty around the FTC’s non-compete ban and the enforceability of the ban, do not hesitate to reach out.