So, Are Non-Competes Still Enforceable or What?
September 4, 2024, was set to be a big day in the long and controversial history of non-competition agreements. That was the effective date set for the Final Rule adopted by the Federal Trade Commission (FTC) in April, which would have rendered the vast majority of current and future non-competes void and unenforceable. Employers and employees alike had marked the date in their calendars, but to the dismay of many workers bound by such agreements and the relief of employers that use non-competes to protect their business interests and trade secrets, a federal judge has stepped in to put the FTC’s ban on hold indefinitely.
Following entry of the August 20, 2024, nationwide injunction issued by Trump-appointed U.S. District Judge Ada Brown of the U.S. District Court for the Northern District of Texas, the non-compete status quo remains in place for now. Thus, employers will continue to look to applicable state legislation and prior judicial precedents to determine how to draft, defend, and enforce these agreements.
Brown’s nationwide injunction follows a narrower ruling in the same action this summer that specifically barred the FTC from implementing and enforcing the Final Rule as to the plaintiffs in that case. In both instances, Brown ruled that the FTC did not have the power to issue such a sweeping ban.
“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,” Brown wrote. “(The rule) is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.”
It’s Not Over ‘Til It’s Over, but It’s Over for Now
While the injunction undoubtedly strikes a serious body blow to the FTC’s efforts to kill most non-competes, it is far from the final word. Not only is the FTC expected to appeal the Texas ruling, but a contrary result was reached earlier this year by a federal court in Pennsylvania that found the FTC properly promulgated the Final Rule.
Meanwhile, state-level efforts to restrict or prohibit non-competes, especially for lower-wage workers, continue apace as over 30 states have legislation on the books that limits the enforceability of non-competes. Michigan is not one of those states, and non-competes involving Michigan workers will generally be held enforceable if they are found to be reasonable in duration and geographic scope and are carefully and narrowly tailored to protect an employer’s competitive business interests.
The immediate takeaway for Michigan employers is that, for now at least, any non-competes that would otherwise survive judicial scrutiny will remain valid and enforceable. Employers are also free to enter into new non-competition agreements subject to the same caveats. To the extent employers were preparing to satisfy the Final Rule’s requirements regarding notifications to affected employees about their rights and the status of their non-compete agreements, those plans can go back on the shelf for the time being.
Maddin Hauser will provide updates as appropriate regarding any new developments involving the FTC’s ban or other efforts in Michigan to limit non-competes. If you have any questions about the injunction or the status of your company’s non-competes, please contact Corinne Rockoff at Maddin Hauser.