Co-Author: Britney Beall-Eder
In early 2024, the Federal Trade Commission (FTC) unveiled a groundbreaking proposal to ban most traditional non-compete clauses in employment contracts across the United States. This initiative was part of a broader strategy to enhance economic mobility by removing barriers that inhibit workers from pursuing new employment opportunities, thereby promoting competition, innovation, and wage growth.
On August 20th, 2024, the United States District Court for the Northern District of Texas enjoined the FTC’s new rule that would have banned essentially all post-employment non-compete agreements. This latest ruling, which applies nationwide, means the FTC’s rule did not become effective earlier this month, as originally scheduled.
If the Northern District of Texas’ injunction was not entered on August 20th, 2024, the FTC’s new rule would have become effective September 4, 2024, which rule would have prohibited employers from enforcing non-compete agreements with their workers, except in cases involving the protection of trade secrets or confidential information in limited circumstances. In summary, the new FTC rule aimed to render such traditional non-compete clauses unenforceable, also mandating that any existing non-compete agreements in violation of the new rule be rescinded. Under the FTC’s new rule, employers would have also been required to inform employees that any non-compete agreements covered under the new FTC rule were void and unenforceable under federal law.
The FTC rule and challenges related to the same, have sparked extensive debate nationwide, leaving many industries questioning how the new rule will reshape employment practices related to non-compete agreements if the rule does eventually go into effect. Various business groups and legal experts argue that the FTC is overreaching its authority, which is likely to result in additional court challenges that could further delay the rule’s implementation. As these challenges unfold, the extent to which the proposed rule will be enacted, if at all—and the timeline for its implementation—remain uncertain.
To the extent that the new FTC rule is implemented in the future, it is not anticipated to cause significant changes for residents of Colorado. Colorado’s existing laws pertaining to non-compete covenants already impose stringent restrictions on traditional non-compete agreements, making them unenforceable in most situations, with limited carve-outs for the protection of confidential information and the protection of trade secrets. Moreover, in light of the fact that the state’s legal framework for non-compete covenants is currently more restrictive than the new FTC rule as proposed, even if the new FTC rule eventually becomes effective, the FTC’s rule is not expected to substantially alter existing practices and permissible non-compete covenants for Colorado businesses or employees.
Notwithstanding the injunction that was entered preventing the new FTC rule from becoming effective this month, it is essential for Colorado employers and employees to stay informed about the status of the new rule’s implementation and the potential legal battles it may face. Businesses are also encouraged to remain diligent in staying up to date on changes to the law with respect to non-compete covenants generally and reviewing their employment contracts to ensure full compliance with both state and federal regulations in an ever-changing employment landscape.
The information provided herein is not intended to provide legal advice to the reader. If you have questions or require assistance in relation to the non-compete covenants or related restrictions under state or federal law, please contact Blake Gabriel for more information.
