Understanding Non-Compete Agreements and Their Future Impact

Understanding Non-Compete Agreements and Their Future Impact: A Guide for Employers and Business Owners

Non-compete agreements are a common legal tool used by businesses to protect their interests and prevent employees from taking confidential knowledge or competitive advantage to other companies.  However, recent regulatory changes, including the Federal Trade Commission (FTC)’s proposed rule, are making significant waves in the world of non-competes, sparking debates on their enforceability and fairness. 

What is a Non-Compete Agreement?

At its core, a non-compete agreement is a legal promise—usually included in an employment, partnership, or sale-of-business contract—that restricts a person from engaging in similar business activities within a defined geographic area for a specific period after leaving a job, partnership, or business.  The purpose is to prevent individuals from directly competing with the employer, business partner, or buyer of a business.

The FTC’s New Rule: A Major Shift

In April 2024, the FTC introduced a rule aimed at curbing the use of non-compete agreements across the United States.[1]  Originally set to take effect on September 4, 2024, the rule has been stayed due to legal challenges.  If implemented, it would render most existing non-compete agreements unenforceable and require businesses to inform their workers that these contracts are no longer valid.  Importantly, the FTC’s definition of “workers” is extensive and includes employees, independent contractors, interns, volunteers, and even sole proprietors who provide services for a business.

However, the rule would have notable exceptions, including:

• Business Sales: Non-competes would still be allowed in the context of business sales.  When selling a business, the buyer can require the seller to agree to refrain from competing in the same market for a set period and within a defined area.
• Executive Contracts: Non-competes for senior executives (e.g., CEOs, CFOs, or presidents) making a certain annual salary can still be enforced, but no new non-competes for executives can be entered into after the rule’s effective date.

The FTC claims that the rule will boost wages for workers, foster competition, and increase the number of new businesses created by former employees.[2]  In essence, the Commission believes that restricting non-competes will enhance labor market mobility and innovation.

Legal Challenges

As expected, the FTC’s new rule has faced several legal challenges.  In Properties of the Villages v. FTC (Case No. 24-cv-316, Middle District of Florida), a Florida court found that the plaintiff was likely to prevail because the FTC had never undertaken a rulemaking of this magnitude before.  The court granted a preliminary injunction, halting the rule’s implementation—at least temporarily—for the parties involved.  This decision is significant because it questioned the FTC’s authority to impose such a wide-reaching rule.

In ATS Tree Services v. FTC (Case No. 24-cv-1743, Eastern District of Pennsylvania) the court came to the opposite conclusion and denied plaintiff ATS Tree Services’ motion for preliminary injunction and stay of the effective date of the non-compete rule.  This case has since been voluntarily dismissed. 

In the most pivotal case, Ryan, LLC v. FTC (Case No. 24-cv-986, Northern District of Texas), the court found that the FTC lacked the authority to make a rule on unfair methods of competition, and did not have the ability to penalize violators without the assistance of the Department of Justice.  As a result, the court stayed the rule’s enforcement nationwide.  The FTC has appealed this ruling, and if the appeal is not withdrawn after the January administration change, the outcome will likely have profound implications for the future of non-compete agreements.

What Does This Mean for Your Business?

With the FTC’s rule currently stayed, non-compete agreements remain enforceable (except in states that do not enforce non-compete agreements like California, Minnesota, North Dakota, and Oklahoma) under the same guidelines as before the rule was introduced.  Courts will continue to evaluate these agreements based on their reasonableness in scope, time, and location.  However, businesses should take note of the following:

• Ongoing Legal Uncertainty: While the FTC cannot currently enforce its rule, the possibility of future change remains.  If the appeal succeeds, non-competes could face severe limitations, and heavy burdens will be placed on employers due to the rule’s requirement that employers contact each former employee to inform them that their non-compete is not enforceable.
• State-Level Regulations: Several states have already placed restrictions or outright bans on non-competes.  The trend of limiting non-competes is gaining momentum across the country, regardless of the success of FTC’s new rule.
• The FTC’s Stance on Anti-Competitive Practices: The FTC remains committed to addressing anti-competitive activities in the labor market, and its stance on non-competes signals that employers may face increased scrutiny of their use of such agreements.  Notably, FTC Commissioners each serve seven-year terms and a majority vote is required for the Commission to act, making their priorities less likely to fluctuate with an administration change.

Conclusion: What’s Next?

The FTC’s rule on non-compete agreements marks a significant shift in the regulatory landscape, but with legal challenges still unfolding, its long-term impact remains uncertain. 

You and your business have alternative options to protect your interests and mitigate your competitive risks.  Primmer is here to help you navigate these changes and ensure that your business remains compliant with evolving labor regulations.  For more information and to learn more, reach out to Madison Prokott at mprokott@primmer.com
 
[1] 16 CFR Part 910.
[2] Fed. Trade Comm’n, FTC Announces Rule Banning Non-Competes, (Apr. 19, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.