The FTC final rule banning most employee noncompete agreements and requiring employers to notify certain workers that these agreements will no longer be enforced has been overturned. Key takeaways and action items are included below, along with a full summary.

Key Takeaways

• A federal court in Texas recently issued a nationwide injunction precluding enforcement of the FTC’s final rule banning most employee noncompete agreements, which was set to go into effect on September 4, 2024.
• Because of the nationwide injunction, noncompete agreements that are otherwise enforceable under state law will remain enforceable for the time being, and employers will not need to comply with the notice provision contained in the FTC’s final rule, which had required employers to provide notice of the noncompete ban to certain workers by September 4, 2024.
• Minnesota’s employee noncompete ban, which prohibits all employee noncompete agreements entered into on or after July 1, 2023, remains in effect.
• Nonsolicitation and nondisclosure agreements are not affected by the FTC rule and remain generally enforceable under both Minnesota and federal law.

Action Items for Employers

• Employers should review their existing employment agreements and consider speaking with an attorney to discuss the enforceability of any existing employee noncompete agreements and to explore alternative methods of protecting their business interests, including through the use of nonsolicitation and nondisclosure provisions in employment agreements.

Action Items for Employees

• Employees who have questions about the enforceability of an existing noncompete agreement, or who have been asked to execute a new noncompete agreement or other restrictive covenant, should consider contacting an attorney to review the agreement and give advice regarding its enforceability and effect.

Ryan LLC v. Federal Trade Commission

In April, the FTC issued a final rule banning most noncompete agreements and requiring employers to notify non-senior executive workers that these agreements will no longer be enforced. Please see our prior article for more details.

However, on August 20, 2024, in Ryan LLC v. Federal Trade Commission, Judge Ada Brown of the United States District Court for the Northern District of Texas entered a final summary judgment order setting aside the FTC noncompete rule and declaring that that rule “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.” In so ruling, Judge Brown concluded that the FTC lacks statutory authority to promulgate the noncompete rule and that the rule is arbitrary and capricious, and therefore that the FTC’s promulgation of the rule is an unlawful agency action. Judge Brown also made clear that her ruling and judgment shall have “nationwide effect” and does not apply merely to the plaintiffs in the Ryan suit.

Judge Brown’s August 20 ruling is a final and appealable order, and the FTC may elect to appeal her decision. Challenges to the rule also remain pending in other jurisdictions, including the Eastern District of Pennsylvania, where the rule is expected to be upheld, which may also lead to an appeal. Ultimately, the Supreme Court will likely be asked to take up this issue. So, while the Ryan decision provides some instant relief from employer compliance with the FTC rule, uncertainty in this area of the law will remain for the foreseeable future.

For now, employers will not need to prepare for compliance with the FTC noncompete rule unless and until Judge Brown’s ruling is overturned. It is important to keep in mind, however, that this ruling does not affect Minnesota’s ban on employee noncompete agreements, which we have previously discussed here. Given that employee noncompete agreements have already been restricted or banned in several states, and that the ultimate enforceability of such agreements under federal law remains uncertain, businesses should take steps to protect their interests through alternative means such as nonsolicitation and nondisclosure agreements, which remain generally enforceable in Minnesota and elsewhere. Henson Efron is ready to assist you in navigating this ever-developing area of law, and we encourage you to reach out to us as the legality of the FTC rule plays out in the federal court system to ensure your interests are protected.

The purpose of this article is merely to provide general information and should not be construed as legal advice.