On October 18, 2024, the Federal Trade Commission (the FTC) filed an appeal with the Fifth Circuit Court of Appeals. The FTC’s appeal seeks to overturn a decision by a U.S District Court in Texas which enjoined the FTC from implementing a proposed rule banning non-competition agreements across the country (the “Rule”).

Had the FTC’s efforts not been enjoined, the proposed Rule would have prevented employers from entering into any new non-competition agreements with their employees. The Rule also would have nullified approximately 30 million existing non-competition agreements. The only exception to the ban would have been agreements signed by “senior executives.”  The Rule defines senior executives as workers who are in a “policy making position” and earn a total annual compensation of at least $151,164. The Rule also requires employers to provide notice to all affected workers that their non-competition agreements were no longer effective. 

The District Court’s August 20, 2024 decision to set aside the Rule was based on two findings. First, the Court found that the FTC exceeded its rulemaking authority when it promulgated the Rule. Second, the Court found that even if the FTC did have the authority to promulgate the Rule, the Rule was still too unreasonably overbroad to be enforceable.

By filing the appeal, the FTC revived the possibility of a nationwide ban on non-competition agreements. The war against non-competition agreements also rages on in separate battlegrounds. For example, before the nationwide ban went into effect, a District Court in Florida issued a preliminary injunction on the basis that the FTC did not have the authority to enact the Rule. In contrast, a District Court in Pennsylvania declined to enjoin the Rule from going into effect, concluding that the FTC did not act unreasonably in issuing the Rule. If these cases create a split in the circuits, the issue could be resolved by the United States Supreme Court.

For now, employers don’t have to worry about complying with the Rule. Employers should, however, remain careful to abide by existing state laws and judicial precedent concerning the enforceability of non-competition agreements. Most jurisdictions will not enforce non-competition agreements that are unnecessarily overbroad, and many jurisdictions have enacted laws that require additional protections for employees who sign non-competition agreements.

Illinois, for example, recently passed the Illinois Freedom to Work Act, which requires that employees earn at least $75,000 a year and receive additional consideration on top of their salary to support a covenant not to compete. The Illinois statute also requires that employees be advised in writing to consult with an attorney before signing the agreement and that employees be given at least fourteen days to consider the agreement before signing it.

California, Minnesota, North Dakota and Oklahoma have already issued bans on the use and enforcement of non-competition agreements except in very limited situations, such as when agreements are made in connection with the sale of a business. Numerous other jurisdictions are following suit and have legislation pending to similarly restrict the enforceability of non-compete agreements.

The legal landscape therefore appears to be changing fast, and employers would be well served to review their existing non-compete agreements to make sure they comply with existing state laws and legal precedent. Employers should also begin to consider alternative means to prevent ex-employees from competing with them unfairly. Alternatives may include providing paid garden leave, as well as drafting enhanced confidentiality and non-solicitation agreements.

The Labor and Employment attorneys at Williams, Bax & Saltzman, P.C. are available to advise employers on how to navigate through this complicated and rapidly evolving area of the law.