On July 27, 2024, the below schedule (i.e., the Bits and the Bytes) on the FTC’s Final Rule on Non-Compete Clauses was posted to this Insights blog. On August 20, 2024, the U.S. District Court for the Northern District of Texas, Dallas Division, issued its opinion in the case of Ryan LLC v. Federal Trade Commission. The District Court opined that the FTC’s Non-Compete Rule is unlawful, and the Court set it aside. The Court held, “[t]he Rule shall not be enforced or otherwise take effect” on September 4, 2024, or thereafter.
A copy of the Court’s opinion may be viewed here. Below are excerpts:
- “Thus, when considering the text, Section 6(g) specifically, the Court concludes the Commission has exceeded its statutory authority in promulgating the Non-Compete Rule. Having determined the FTC exceeded its statutory authority, the Court pretermits further discussion of statutory bases.”
- “In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action. See 5 U.S.C. § 706(2).”
- “Thus, the Court hereby holds unlawful and sets aside the Rule. See 16 C.F.R. § 910.1–.6.14 The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”
This District Court’s ruling is in contrast to other rulings from other courts across the country in that this District Court for the Northern District of Texas, Dallas Division found that the FTC Rule is unlawful and set it aside as to all, not just as to the parties involved in the specific litigation.
This opinion will not be the last word on the subject, so remain vigilant.
Previous Insights Blog – The Bits and the Bytes on FTC Final Rule on Non-Compete Clauses (Rule Later Deemed Unlawful)
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LEGAL INFORMATION (NOT LEGAL ADVICE) ON FTC FINAL RULE ON NON-COMPETE CLAUSES FOR “WORKERS” 16 C.F.R. §§ 910.1 – 910.6 https://www.ftc.gov/legal-library/browse/rules/noncompete-rule |
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Overview of FTC Final Rule |
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| Bans non-compete clauses applicable to a “worker,” which is defined as any natural person who is or was an employee, contractor, extern, intern, volunteer, apprentice, or sole proprietor. Bans non-compete clauses applicable to a “senior executive,” if the clause was entered into after the Final Rule becomes effective (September 4, 2024, current anticipated effective date).
Businesses with non-compete clauses in place with a worker must notify the worker that the non-compete clause will not be enforced. Barring any nation-wide injunction, the Rule will take effect September 4, 2024. To date, none of the courts have provided any reliable indication that a nation-wide injunction will be forthcoming. Remain vigilant of judicial opinions on this subject, especially in regard to pending requests for nation-wide injunction to application of the FTC Final Rule. |
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Considerations for Business Entities |
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| (1) Identify existing agreements that have non-compete clauses, including agreements for employment, contractor, or other “worker.”
(2) Determine whether the worker is a natural person. (3) Determine whether the natural person is/was a “senior executive.” (4) For any worker who is subject to a non-compete clause and is not a senior executive, provide a notice of non-enforcement. Model notice included below. Notice may be delivered by any reasonable means, including mail, email or text message. (5) After September 4, 2024, do not enter into any non-compete clause with a senior executive. |
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Definitions and Rules |
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| Non-Compete Clause
§ 910.1 |
(1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
(i) seeking or accepting work in the U.S. where such work would begin after the employment that includes the term or condition; or (ii) operating a business in the U.S. after the employment that includes the term or condition. (2) A term or condition of employment includes a contractual term or workplace policy, whether written or oral. |
| General Rule:
Workers (Not Senior Executives) § 910.2(a)(1) |
With respect to a worker other than a senior executive, it is an unfair method of competition for a person:
(i) To enter into or attempt to enter into a non-compete clause; (ii) To enforce or attempt to enforce a non-compete clause; or (iii) To represent that the worker is subject to a non-compete clause. |
| General Rule:
Senior Executive § 910.2(a)(2) |
For senior executives, it is an unfair method of competition for a person:
(i) To enter into or attempt to enter into a non-compete clause; (ii) To enforce or attempt to enforce a non-compete clause entered into after the effective date (September 4, 2024, tentative); or (iii) To represent that the senior executive is subject to a non-compete clause, where the clause was entered into after September 4, 2024. |
| Worker
§ 910.1 |
A natural person who works or worked, whether paid or unpaid, without regard to the worker’s title or status under any other law, including an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The term does not include a franchisee in a franchisee-franchisor relationship. |
| Senior Executive
§ 910.1 |
(1) Was in a policy-making position; and
(2) Received from a person for the employment: (i) Total annual compensation of at least $151,164 in preceding year; (ii) Total compensation of at least $151,164 when annualized if the worker was employed only part of the preceding year; or (iii) Total comp of at least $151,164 when annualized in the preceding year before the worker’s departure if the worker departed before the preceding year and the worker is subject to a non-compete clause. |
| Policy-Making Position
§ 910.1 |
President, CEO or equivalent, and any officer who has policy-making authority, or any natural person who has policy-making authority for the business similar to an officer with policy-making authority.
An officer of a subsidiary or affiliate that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position. A natural person who does not have policy-making authority over a common enterprise is not in a policy-making position. |
| Policy-Making Authority
§ 910.1 |
Final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary. |
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Model Notice to a Worker Who is Subject to a Non-Compete Clause (§ 910.2(b)(4)) |
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| The new rule enforced by the Federal Trade Commission makes it unlawful for EMPLOYER to enforce a non-compete clause as to certain workers. As of September 4, 2024, EMPLOYER will not enforce any non-compete clause against you. This means that as of September 4, 2024: (1) you may seek or accept a job with any company or any person – even if they compete with EMPLOYER; and/or (2) you may run your own business – even if it competes with EMPLOYER. The FTC’s new rule does not affect any other terms or conditions of your employment with EMPLOYER. For mor information about the rule, visit https://www.ftc.gov/legal-library/browse/rules/noncompete-rule and/or https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at https://www.ftc.gov/legal-library/browse/rules/noncompete-rule. | |
| Exceptions
§ 910.3 |
(a) A non-compete clause entered into by a person pursuant to a sale of a business, of the person’s ownership interest in a business, or of all or substantially all of a business entity’s operating assets.
(b) Where a cause of action related to a non-compete clause accrued before September 4, 2024. (c) To enforce, attempt to enforce, or make representations about a non-compete clause where a person has a good-faith basis to believe the Rule is inapplicable. |
