On August 20, 2024, a federal judge in Texas barred the FTC Non-Compete Clause Rule from taking effect.

For small business owners, this decision is more than just a legal ruling—it’s a reminder of how the legal system directly shapes the way you can protect your business and your employees. In this case, a federal judge blocked the Federal Trade Commission (FTC) from enforcing its new non-compete ban, questioning whether the agency even has the authority to regulate such agreements in the first place.

The ruling means the FTC’s proposed ban, which was set to take effect on September 4, 2024, is on pause nationwide. However, this decision is not the final word, and ongoing litigation will likely keep the issue alive for some time.

Guided Insight: Why Non-Compete Matter and How We Got Here

To gain a deeper understanding, continue reading (estimated read: 4 minutes)

Non-Compete Rule’s Purpose

The FTC’s proposed rule came about in January 2023, when the agency claimed that non-competes were hurting workers by limiting their ability to move between jobs and find higher wages. The FTC argued that these agreements restricted competition and reduced innovation. By banning them, the FTC hoped to open up job markets and allow employees to have more freedom in their career choices.

While that sounds good on paper, many business owners and industry groups pushed back. They argued that banning non-competes would put businesses—especially small ones—at a disadvantage. Without non-competes, employees could leave and take important business secrets with them, putting years of effort and investment at risk.

Why Non-Competes Are Crucial for Small Businesses

Small businesses thrive on the unique relationships and knowledge they build, and non-compete agreements are key to protecting those valuable assets. When a key employee moves on, non-competes ensure they won’t take your insider knowledge, trade secrets, or client relationships straight to a competitor or launch their own business using what they’ve learned from you. It’s about safeguarding what makes your business special—whether that’s a well-curated client list or specialized training.

When paired with non-solicitation agreements, you create a solid, proactive protection plan. Non-solicitations prevent former employees from reaching out to your clients or recruiting your staff, ensuring that the time and resources you invested stay within your business. Together, these agreements help keep your competitive edge sharp, empowering your business to grow confidently, knowing you’re protected from potential risks.

Understanding the Role of the FTC

The FTC is responsible for enforcing federal laws that promote fair competition. It typically oversees things like mergers and acquisitions to make sure that no one company becomes too powerful. But when it comes to non-compete agreements, the FTC was stepping into new territory, claiming that these agreements are unfair competition practices.

The Texas judge ruled that the FTC overreached by trying to implement a broad ban on non-competes. The judge also stated that the FTC had not proven that banning these agreements was necessary or justified. Essentially, the court is saying that it’s not the FTC’s job to regulate employment agreements on this level.

How Does a Texas Judge’s Ruling Affect Arizona?

Federal court rulings, like the one in Texas, can impact businesses nationwide. This means Arizona business owners can still use non-compete agreements—at least for now. Arizona has its own rules, which allow non-competes as long as they’re reasonable, but those rules could have been overridden by the FTC’s ban had the Texas court not stepped in.

For now, Arizona small business owners can breathe a sigh of relief knowing they’re not immediately subject to the FTC’s sweeping rule. However, with the possibility of appeals, the situation could change, so it’s important to stay informed.

Arizona’s Rule on Non-Competes

In Arizona, non-compete agreements are legal, but they have to be reasonable to be enforceable. That means you can use a non-compete to protect your business as long as it doesn’t go too far in restricting an employee’s ability to find a new job. Arizona courts will enforce non-competes that are fair in terms of time, geographic area, and the scope of the restriction.

For Arizona small business owners, these agreements are vital tools for protecting hard-earned business secrets, customer relationships, and specialized training. Non-competes help prevent employees from taking what they’ve learned and using it against you by joining a competitor or starting their own business. In a competitive market, that layer of protection can be the difference between maintaining stability and watching a key employee walk away with your business’s competitive edge.

What’s Next?

The legal process isn’t over yet, and it’s essential to keep an eye on how this case develops. If the FTC rule eventually goes into effect, non-compete agreements could be a thing of the past. But as of now, small business owners can still protect their operations by using non-competes—provided they’re drafted carefully and in compliance with Arizona’s legal standards.

In the meantime, it’s a good idea to review your existing non-compete agreements to ensure they’re reasonable and likely to hold up in court. And if you don’t already have them in place, it might be time to consider how non-competes could help protect your small business from unfair competition. After all, you’ve worked hard to build your business—make sure it’s protected.