Dear clients and colleagues,

Early last year, we informed you about the Federal Trade Commission’s (FTC) newly proposed Non-Compete Clause Rule (the “Rule”). This Rule aimed to ban both existing and future non-compete provisions in employment agreements. Set to take effect on September 4, 2024, it would have made it difficult for employers to enforce restrictions on employees joining competing businesses and required them to update any existing agreements containing non-compete clauses.

It was anticipated that this comprehensive ban on non-compete provisions would face significant opposition, and indeed, on August 20, 2024, the United States District Court for the Northern District of Texas issued a final order setting aside the Rule, ruling that it “shall not be enforced or otherwise take effect.”

The significance of non-compete provisions for employers cannot be overstated. These clauses are very common in Israel and are incorporated into employment agreements across nearly all market sectors, including hi-tech, finance, and manufacturing. They play a crucial role in protecting business interests by preventing key employees from joining competitors or starting competing ventures.

At this stage, the final word on the Rule has yet to be spoken. The FTC has indicated that it is considering a potential appeal. Meanwhile, an FTC spokesperson stated that the commission “will keep fighting to stop non-competes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages.” The spokesperson also noted that this decision does not prevent the FTC from addressing non-compete issues through case-by-case enforcement actions.

Additionally, two other challenges to the Non-Compete Clause Rule are currently pending before other district courts. If these challenges result in conflicting orders, it will be up to the courts of appeals and ultimately the United States Supreme Court to determine whether to uphold the decision of the District Court for the Northern District of Texas or allow the Rule to take effect.

Either way, the final determination will impact Israeli companies operating in the US as well as the Israeli market as a whole. While US companies are unlikely to face restrictions imposed by the Rule or related FTC enforcement regarding their employees in Israel, they might find it beneficial to employ individuals in Israel due to the ability to include non-compete provisions in their employment agreements. However, US companies might also choose to adopt a unified global employment policy that excludes non-compete clauses. But by doing so, they would miss out on the advantages of non-compete provisions (which are particularly valuable in businesses involving intellectual property).

Our firm advises on all aspects of cross-border mergers and acquisition and employment law, as well as ongoing corporate matters.