Minnesota Lawyer and Finance & Commerce – Partner Content
Authors: Cory Olson and Will Paterson
As most Minnesotans know at this point, on July 1, 2023, Minnesota became the fourth state to largely ban non-compete agreements. But that did not mean Minnesota employers could stop worrying about non-compete agreements. The new law did not affect agreements entered into before the law was enacted. Furthermore, forty-six other states continue to recognize the enforceability of such agreements. For employers looking to recruit talented employees, non-compete agreements remain a substantial hurdle.
But things started to look different this past spring. On April 23, 2024, the FTC issued the Non-Compete Clause Rule. The Rule states that “it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date.” In short, the Rule banned new non-competes for all workers. For existing non-competes, the Rule differentiated between senior executives (existing non-competes are enforceable) and non-executive workers (existing non-competes are not enforceable). Most importantly, the Rule was nationwide, putting every state and every employee on equal footing. The rule was set to go into effect 120 days later, on September 4, 2024.
Soon after the FTC announced the rule, we heard from employers and employees alike, all of whom had circled September 4 on the calendar. But everyone’s excitement (or angst, depending on one’s views) needed to be tempered. Almost as soon as the rule was issued, the rule was challenged in federal courts in at least three states: Pennsylvania, Texas, and Florida.
In the 120 days scheduled between the announcement of the rule and it taking effect, those lawsuits have been working their way through the legal system with mixed results. In Pennsylvania, the Court backed the FTC and found sufficient support to enforce the Non-Compete Clause Rule. On the flip side, a Federal Court in Florida prohibited the FTC from enforcing the Non-Compete Clause Rule but did so only as it relates to the individual plaintiff in that case. Then, on August 20, the U.S. District Court for the Northern District of Texas, “set[] aside the Non-Compete Rule. Consequently, the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” Ryan, LLC v. Fed. Trade Comm’n, No. 3:24-CV-00986-E, 2024 WL 3879954 (N.D. Tex. Aug. 20, 2024). In other words, not only did the Court rule against the FTC and block the Non-Compete Clause Rule, but the ruling is nationwide. As a result, the rule did not go into effect, and non-compete agreements remain enforceable, subject to state limits such as those adopted by Minnesota.
Due to the significance of this issue, it is likely that the FTC will appeal the decision, and the parties—and country—will have to wait to see how it plays out in the appellate courts. If the U.S. District Court for the Northern District of Texas is reversed, then the Rule may eventually go into effect. If not, then the Rule may never go into effect. But as we all know, however, the retraction never receives the same publicity as the headline, and many employers or employees may be under the mistaken belief that non-compete agreements are no longer valid. If they act upon that belief, either by violating or interfering with a non-compete agreement, they may find themselves as an unexpected defendant in a lawsuit. Until the legal challenges are resolved, either through judicial or legislative action, employees and employers will have to rely on their state statutes and previous case law when it comes to non-competes.
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Cory Olson is a shareholder at Anthony Ostlund where his litigation and trial practice focuses on securities arbitration, fraud, disputes between business owners, and shareholder litigation.
William Paterson is an attorney with Anthony Ostlund Louwagie Dressen & Boylan P.A. He represents clients in a broad range of business disputes in both state and federal court.
