Summary: the legal question may become less complicated as the new Congress and President take office, but employers should still move with caution when requiring employees to execute non-compete agreements.
At the federal level
In further explanation, in early 2024, the Federal Trade Commission (“FTC”) issued a Final Rule that made most employee non-compete agreements/clauses unlawful. The exceptions involved circumstances where non-compete agreements were/are executed pursuant to the sale of a business and with regard to non-compete agreements with senior executives (those earning $151,000+).
In August 2024, a federal court in Texas issued a ban on the enforcement of the FTC’s Final Rule. The court’s injunctive Order applied nationally even though at least three other federal courts had issued opinions disagreeing with the legal reasoning of the Texas court. The Texas injunctive Order is on appeal, which may lead to a Circuit Split or resolution by the Supreme Court. The specific legal question is whether the FTC had/has the statutory authority to issue the Final Rule.
In the meantime, the National Labor Relations Board (“NLRB”) entered the arena. In June 2024, an administrative law judge (“ALJ”) for the NLRB held that an employer’s non-compete agreement was void since it interfered with the relevant employee’s ability to engage in “concerted activity” protected by federal labor laws. For similar reasons, the ALJ also voided the company’s non-solicitation agreement. See, In re J.O. Mory, Inc., 25-CA-336995 (NLRB 2022).
To summarize, at the federal level, the FTC’s Final Rule has been voided (for now), but an NLRB ALJ has issued an opinion stating that non-compete (and non-solicitation) agreements can violate the National Labor Relations Act.
The election effect
There is a political element to the legal efforts to restrict the impact of non-compete agreements. Those with left-leaning politics tend to dislike non-compete agreements, while the opposite is true for those with right-leaning politics. Thus, efforts to curtail the impact of non-compete agreements are not surprising given the political leanings of the current federal administration. However, a politically right-leaning administration will enter office in January 2025. Such may well influence or eliminate efforts to ban non-compete agreements by federal authorities. For example, the new administration has nominated a new Chairman of the FTC. The new administration will also have the opportunity to nominate members of the NLRB.
At the State level
The legality and enforceability of non-compete agreements have normally been a function of State law. Many States have laws that ban enforcement of non-compete agreements, and every jurisdiction has various statutory and judicially-imposed limitations and requirements. For example, most States require that a non-compete agreement be geographically circumscribed and short in term.
Thus, for now, State laws regain their preeminence when an employer seeks to require non-compete agreements/clauses from their employees.
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