The FTC’s Noncompete Ban: a Complete Guide

On April 23, 2024 the Federal Trade Commission (FTC) announced a new rule that declares noncompete agreements as unenforceable nationwide. Lawsuits seeking injunction are already being brought against the FTC which could push back the effective date of this rule, so this will be a situation to monitor closely.

Here’s what we know about the noncompete ban so far.

Skip ahead to:
Who does the noncompete ban apply to?
When would a noncompete ban go into effect?
Why did the FTC want to ban noncompetes? What are the benefits?
As an employee who signed a noncompete, what should I do?
What are the chances that this gets overturned?
I want to review my employment contract with a lawyer

The FTC’s final rule indicates that noncompetes will be unenforceable for the following groups:

• All workers would be affected according to the ruling, including an “employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person. The definition further states that the term ‘worker’ includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.”
• All states nationwide (Noncompetes were already banned in Oklahoma, California, North Dakota, and Minnesota before this ruling)

However, existing noncompetes with “senior executives” may remain in effect under this rule. Employers cannot enter into new noncompetes with new senior executives.

The ruling doesn’t go into effect until 120 days after publication of the rule into the Federal Register, and that won’t happen until after lawsuits are settled that are already seeking injunction against this rule. For example, in the Eastern District of Texas, the US Chamber of Commerce has already filed a lawsuit seeking injunction against the FTC’s noncompete ban. The US Chamber of Commerce argues that noncompetes don’t fall under the jurisdiction of the FTC, but rather “well-established state laws governing their use.” 

A Dallas-based tax software company, Ryan LLC, is also joining the fight by filing a lawsuit against the FTC’s noncompete directive, arguing that the ruling is a “lawless” act and that it will hurt the ability of companies like theirs to protect their IP and retain top talent.

The rule was announced on April 23, 2024 but does not yet take effect until these lawsuits reach their resolution, and even then, only if the directive is upheld.

The FTC in their announcement claims that “Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business.”

FTC Chair Lina M. Khan doesn’t mince words about the impact of noncompetes: “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism.”

The announcement of the new rule also lays out predictions for what a ban on noncompetes would lead to:

• New business formation growing by 2.7% per year
• 8,500 additional new businesses created per year
• Higher earnings for workers (under the belief that noncompetes largely prevent workers from going out into the labor market to seek out higher earning positions)
• Tens of thousands of new patents each year over the next ten years (underpinned by the idea that stronger competition will actually spur innovation much faster than in a world where noncompetes caused talent to stay clustered around a few strong companies)

The most important thing to note is that, at the time of this writing, the noncompete ban is not yet in effect. That means your noncompete clause (if you have one in your employment agreement) has not been affected by the FTC’s rule. Since the rule will likely be tied up in litigation for some time, it’s currently unclear when these noncompete clause will become unenforceable if ever.

If you are currently a jobseeker, make sure that you review an employment agreement carefully before signing – so that you understand non-disclosure, noncompetes, and other conditions of employment. If you are a Texas employee, our attorneys at Jackson Spencer Law can conduct a contract review for you and help you understand the pros and cons of the contract you’re considering. Reach out today to learn more – via the phone number or contact form on our website.

Where things start to get interesting for employees in the meantime, while we wait for the rule to come into effect, is considering the position of “senior executives.” The FTC ruling specifically states that senior executives may still be subject to their noncompete even after the ruling. Savvy employers may try to lock up key executives into senior level roles and sign noncompetes before the ruling comes into effect – so that they would be protected from losing that employee to competition. So if you’re suddenly being offered such a position – do your research, study the employment contract, get everything in writing from your employer, and speak to an experienced attorney who can review your contract for you to help you determine if you’re about to lose serious career flexibility.

It is currently unclear how long the litigation process may tie up implementation of this ruling, as the main arguments against the FTC center around who has the jurisdiction and authority to issue such a ban on noncompetes. It is not a matter of getting overturned: the question is will the courts uphold the FTC’s authority to issue the ban. If not, noncompetes will remain in effect just as they do at the time of this writing.

The attorneys at Jackson Spencer Law protect Texas employees from workplace rights violations, discrimination, and other employment law issues. We have a tremendous amount of collective experience in reviewing employment agreements and helping you determine how a given contract would affect your future employment opportunities, including questions around noncompetes. You can speak to a friendly member of our staff by calling 972-301-2937 or by filling out the form on the side of this screen.