As you may have heard, any noncompetes your company has in place could be on the chopping block. The Federal Trade Commission (FTC) had planned to implement a new rule on September 4, 2024, aimed at restricting non-compete agreements beyond just state or local regulations. The rule was designed to limit the use of non-compete clauses in employment contracts, with the goal of enhancing workers’ ability to change jobs freely and fostering greater competition.
However, the FTC faced a significant setback on August 20 when a federal court in Texas issued a nationwide injunction blocking the enforcement of this rule. Judge Ada Brown, who issued the ruling, criticized the FTC’s reach, determining it had overstepped its authority and found the rule to be excessive and unreasonable. As a result, the implementation of the noncompete rule has been halted across the United States.
The FTC has signaled that it’s combating the injunction by challenging non-compete agreements it considers restrictive to workers’ job mobility, and it may appeal the decision. In short, while still enforceable under federal law, your current noncompetes are not out of the woods.
Status of non-compete agreements: With the injunction in place, existing federal non-compete agreements remain valid and enforceable. Employers can continue to uphold these agreements as they did before the rule was proposed. Of course, your state may have different rules regarding non-competes that are not affected by this Texas court ruling.
Notification requirements: The rule’s requirement for employers to notify employees and former workers about the non-compete clause provisions is no longer applicable. Employers who have already sent out these notifications may seek legal advice to determine if they can retract them.
Ongoing legal challenges: This ruling is part of several lawsuits challenging the FTC’s non-compete rule and is the first to have a nationwide impact. Although this decision provides a temporary reprieve for employers, the final resolution of the legal challenges is still uncertain.
State and local regulations: The recent federal court injunction does not alter state or local regulations concerning noncompete agreements. For example, where I practice in Minnesota, the current status means that the state’s ban on non-compete clauses in employment contracts remains fully enforceable. Even though the FTC’s new rule has been halted at the federal level, Minnesota’s restrictions on noncompetes continue to apply. Employers in Minnesota must adhere to these state-specific regulations, regardless of the federal ruling.
This decision appears to be influenced by the June ruling that curtailed the Chevron deference—a principle that had previously allowed agencies to interpret laws and create regulations. It is important to keep in mind that the injunction on the FTC’s rule does not mean that noncompete agreements are allowed everywhere; state and local laws can still regulate them. For example, in addition to Minnesota, North Dakota, Oklahoma, and California have enacted bans on non-competes, with another 33 states limiting non-competes.
As the situation evolves, employers should stay informed about ongoing legal developments and consult with an attorney to effectively navigate the changing regulations.
Jared Nusbaum is an attorney with the law firm of Zlimen & McGuiness, PLLC in St. Paul, MN. His practice areas include employment law, small business law, litigation, and bankruptcy. Email him at jnusbaum@zmattorneys.com. Ellie Sammon, a law clerk at Zlimen & McGuiness, PLLC contributed to this column. Sammon is a 2L at the University of St. Thomas School of Law.