April 30, 2024

Free Market or Free-For-All? The FTC’s Recent Noncompete Ban

By Thaís Dourado

Nearly 15 months after the Federal Trade Commission (FTC) first issued its proposed rule to banning noncompete clauses as an unfair method of competition, the Commission voted and decided to ban noncompetes nationwide, issuing a final rule on April 23, 2024 (the “Final Rule”). Noncompetes are agreements between employers and employees restricting former employees from working for competitors for a specified period of time. Noncompetes are generally viewed as beneficial to employers because they protect companies’ proprietary information, intellectual property, and trade secrets. Employees believe noncompetes unfairly limit their ability to move between jobs, preventing them from obtaining advancements internally and externally.

The Final Rule adds a new subchapter J, consisting of part 910, to chapter I in title 16 of the Code of Federal Regulations and will become effective 120 days after publication in the Federal Register. As part of its approval process, the FTC received more than 26,000 comments on the proposed rule, with over 25,000 supporting the proposed ban on noncompetes. Certain business groups, including the U.S. Chamber of Commerce, strongly opposed the ban, arguing, among other things, that noncompetes increase innovation and competition and challenging the FTC’s authority to promulgate rules respecting unfair methods of competition. Accordingly, legal challenges to the Final Rule are highly anticipated, with multiple lawsuits having already been filed in federal courts.

The Final Rule banning noncompete agreements binds all U.S. states. Before the FTC’s Final Rule, certain jurisdictions already considered noncompete agreements entirely or largely unenforceable. California, for example, guarantees a private right of action by current, former, and prospective employees against any employer who entered or attempted to enforce void noncompetes under California law.

In Texas, like other U.S. jurisdictions, state law imposes certain restrictions on the enforcement of noncompetes. The Texas Covenants Not to Compete Act generally governs noncompete agreements within the state. Under the Final Rule, to the extent this statute is inconsistent or less restrictive than its terms, the Texas Covenants Not to Compete Act will be superseded and annulled starting on the Final Rule effective date. In fact, according to its § 910.4(a), the Final Rule supersedes all state statutes, regulations, orders, or interpretations applicable to a noncompete clause insofar as such laws would otherwise permit or authorize a person to engage in conduct that conflicts with the terms established by the Final Rule’s terms.

Senior executives receive a different treatment when it comes to existing noncompetes under the Final Rule. For senior executives, noncompetes existing before the Final Rule’s effective date can remain in force. The Final Rule defines “senior executive” as a worker who: (a) was in a policy-making position; and (b) received (i) total annual compensation of at least $151,164 in the preceding year, (ii) total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year, or (iii) total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a noncompete clause.

It is crucial for both employers and employees to seek legal advice to help them navigate the implications of the Final Rule, especially because of the legal uncertainty around the implementation of the rule given the current legal challenges underway by its opposers. Besides ensuring compliance with new regulations, employers may be required to revise their employment contracts to develop alternative strategies for protecting their intellectual property and confidential information and to establish policies that align with the Final Rule. Likewise, employees need to understand their rights and obligations under their employment contracts considering the FTC’s noncompete ban and the enforceability of noncompete agreements after the Final Rule’s effective date.

Whether it is eventually implemented or not, the Final Rule may ultimately reshape the dynamics of employer-employee relationships in Texas and throughout the United States.

Share this Article

Meet the Author

Thaís Dourado, Associate

Thaís Dourado is a commercial litigation associate who brings a dynamic and diverse perspective to her legal practice from her international background. With many years of legal practice in both Brazil and the United States, Thaís has advised and represented […]

Learn More