It’s Not a Competition: FTC’s Non-Compete Rule

In April, the Federal Trade Commission (FTC) published a Final Rule that prohibits most non-compete clauses, which was set to take effect on September 4, 2024. The Final Rule would have made it easier for a school to hire or contract with an individual who is subject to a non-compete clause. A Texas federal district court recently ruled that the FTC exceeded its authority and that the Final Rule was arbitrary and capricious, largely due to the prohibition’s scope. Ryan LLC v FTC, No. 3:24-CV-00986-E (ND Tex, August 20, 2024). The court barred the Final Rule from taking effect nationwide. 

Non-Compete Clauses and the Final Rule

Generally, a non-compete clause prevents a former employee from competing with an employer after employment ends. School officials may encounter non-compete language in service agreements with independent contractors, such as food service management or transportation companies. 

Subject to a “senior executive” exception, the Final Rule prohibits an employer or other entity from:

• entering into or attempting to enter into a non-compete clause with a worker,
• enforcing or attempting to enforce a non-compete clause against a worker, or
• representing that a worker was subject to a non-compete clause.

The Final Rule’s definition of “worker” includes employees, as well as independent contractors and volunteers.

The Final Rule also requires an employer or other entity that entered into a non-compete clause to notify the worker by September 4, 2024 that the clause is not enforceable.

District Court’s Impact

The district court’s opinion states that the Final Rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” This opinion applies nationwide. While the FTC may appeal the ruling to the Fifth Circuit Court of Appeals and potentially the U.S. Supreme Court, recent holdings from each court indicate that any challenge by the FTC is not likely to be successful. Accordingly, the Final Rule is no longer expected to take effect on September 4, 2024.