The Uncertain Fate of Noncompetes Following FTC Ban Appeal and Presidential Election, by Attorneys Keith Gutstein, Aaron Solomon, Alisha Talati, 12-5-2024

The fate of noncompete agreements remains uncertain after the Federal Trade Commission (FTC) filed a notice of appeal with the U.S. Circuit Court of Appeals for the Fifth Circuit challenging an earlier decision by a Texas federal judge that set aside its nationwide ban of most noncompete agreements.

Further adding to the uncertainty is Republican Donald Trump’s victory in the presidential election, as it may result in a leadership change at the FTC, where Lina Khan, a Biden appointee, is now at the helm. While her term has expired, she is allowed to remain until a replacement is confirmed.

Background on FTC Ban

This past April, the FTC issued a final rule that would essentially ban virtually all noncompete clauses in employment contracts—those provisions that generally prevent workers from taking a new job or starting a new business for a certain period after leaving an employer. The rule would have also invalidated any such provisions in any outstanding employment or independent contractor agreement.

The rule drew much controversy and ultimately was struck down by a Trump-appointed federal judge in Texas on Aug. 20 before it was scheduled to go into effect on September 4. Judge Ada Brown of the U.S. District Court for the Northern District of Texas, in setting aside the FTC’s noncompete rule determined that “the FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious.”

Recent Developments

The FTC had 60 days or until October 19 to appeal the ruling, which it essentially did.

This represented the agency’s second appeal within a month. On Sept. 24, the FTC appealed a different court decision involving the Properties of Villages, Inc. in Florida. The appeal was in response to the United States District Court for the Middle District of Florida on Aug. 15 granting the Properties of the Villages a motion to stay the effective date of the FTC’s proposed ban on noncompetes and preliminarily enjoin the FTC from enforcing it against POV.

Among other developments, on Oct. 4, a Pennsylvania company filed a notice of voluntary dismissal in the U.S. District Court for the Eastern District of Pennsylvania regarding its lawsuit challenging the FTC’s noncompete rule following the court denying the company’s motion to stay the proceedings. The case had been ongoing despite the rule being enjoined nationwide.

Additionally, National Labor Relations Board General Counsel Jennifer Abruzzo joined the fray taking aim at noncompetes in an Oct. 7 memo to all field offices outlining “her intent to not only prosecute employers who require that their employees sign noncompete agreements and “stay-or-pay” provisions, but to, as fully as possible, remedy the harmful monetary effects employees experience as a result of these provisions.” Abruzzo has been vocal about her disdain of the use of noncompetes issuing a GC Memorandum last May 2023 “taking the position that, except in limited circumstances the proffer, maintenance, or enforcement of noncompete provisions violates the National Labor Relations Act.”

To be sure, much can change in the coming weeks and months. Kaufman Dolowich will continue to monitor new developments and provide updates accordingly.

Be Aware of State-Specific Bans

Consider that even though noncompete clauses have averted a nationwide ban, employers should still ensure they are complying with any state-specific bans/restrictions on such agreements and be on the lookout for attempts to attack the enforcement of noncompete provisions made by any governmental agency or legislative body.

Authors:  Keith J. Gutstein, Co-Chair of the Labor & Employment Law Practice Group; Aaron N. Solomon, Partner; Alisha Talati, Attorney