Closing a Loop: Texas Court Sets Aside FTC’s Non-compete Ban Nationally

Closing a Loop:  Texas Court Sets Aside FTC’s Non-compete Ban Nationally

It’s somewhat old news by now, but on August 20, 2024, the federal court in the Northern District of Texas held that a rule adopted by the Federal Trade Commission (“FTC”) relating to non-compete agreements (the “Rule”) was unlawful and, crucially, set it aside on a nationwide basis (Ryan LLC v. Federal Trade Commission, 3:24-cv-00986 (N.D. Tex.)).  As note in a previous post, the Rule would have banned non-competes except in the context of business sales, voided pre-existing non-competes except with respect to some “senior executives,” and required employers to notify workers if non-competes they had entered into were invalid.  The court determined that the FTC lacked the statutory authority to enact sweeping substantive rules with such potentially broad impact and that the rule was arbitrary and capricious.   The Rule was scheduled to take effect September 4, 2024.

It remains to be seen whether the FTC will appeal the Texas court’s decision to the Fifth Circuit, a business friendly court from which an adverse opinion might seek more fulsomely to limit the agency’s power. 

Concurrently, two addtional challenges to the Rule are pending.  The FTC has indicated that it will appeal to the Eleventh Circuit a decision of a Florida court that enjoined the FTC from enforcing the Rule against the particular plaintiff in that case.  The Florida court based its decision on the “major questions” doctrine, which bars agencies from resolving questions of “vast economic and political significance” without clear statutory authorization to do so.  In contrast, in Pennsylvania, a federal court refused to enjoin enforcement of the Rule against a particular plaintiff, finding, among other things, that the FTC did, in fact, have substantive authority to issue the Rule.  A “circuit split” could ultimately result in the Supreme Court’s review of the Rule.  Given the Supreme Court’s recent overturning of the longstanding Chevron doctrine, under which courts had deferred to agencies’ interpretation of statues relevant to their mission, the Rule’s ultimate demise would seem likely.

Though employers have reason to breathe more freely as a result of the Texas court’s ruling in Ryan, they should be aware that the Rule and the challenges to it may have re-invigorated interest among state legislatures in curtailing non-competes.   Many states already  place limitations on the enforceability of non-compete provisions (including compensation thresholds and notice requirements, among other employee protections).  Renewed attention to these limitations, as well as strong confidentiality and non-solicitation provisions, remain central components of an employer’s protection of its competitive position. 

 

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Law Office of Edward Scharfenberg, LLC. By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content, which may be changed without notice.

 

FTC Rule Bans Non-compete Agreements, Pending Effectiveness of Rule: Stay Tuned

In April 2024 the Federal Trade Commission (“FTC”) adopted a comprehensive rule (the “Rule”) banning all post-employment noncompete agreements, based on its view that such agreements represent an unfair method of competition under the Federal Trade Commission Act.  The Rule is scheduled to take effect September 4, 2024. 

The Rule already is subject to court challenges, largely focused on the FTC’s lack of statutory authority to enact sweeping substantive rules with such potentially broad impact.   Although there is a good chance that the Rule will be enjoined before it goes into effect, it makes sense for companies that have entered into non-compete agreements with their “workers” to take stock of these agreements and prepare for compliance with the Rule.

If the Rule becomes effective, employers will be prohibited from entering into new non-compete agreements with “workers” (a term including employees and independent contractors) or enforcing existing non-compete agreements entered into prior to the Rule’s effective date.  

There are important exceptions:

·       Employers may maintain (and enforce) non-competes in effect prior to the Rule’s effective date with “senior executives”.  “Senior executives” earn in excess of $151,164 in the preceding year and have “policy making” authority for the entire organization. 
·       Employers may enforce non-compete agreements if the violation occurred prior to the effective date of the Rule
·       The Rule does not apply to non-competes entered into by a person in connection with the bona fide sale of a business. ·       The Rule does not apply to non-profit organizations, banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and business subject to the Packers and Stockyards Act.

 Prior to the effectiveness of the Rule, employers will need to provide notice to each “worker” who is not a “senior executive” explaining that non-compete covenants will no longer be in effect and will not be enforced when the Rule becomes effective. 

While legal challenges to the Rule play out, employers should take a cautious “wait-and-see” approach by:

·       Compiling a list of employees (who are not “senior executives”) and independent contractors subject to non-compete agreements;
·       Preparing (but NOT sending) a form of notice conforming to the Rule’s guidance to be sent to relevant employees and independent contractors;
·       Determining if there are any “senior executives” whom they wish to subject to non-compete agreements before the Rule takes effect;
·       Staying abreast of the court challenges, and any resulting injunctions of the Rule’s effectiveness.

It is important to note that confidentiality and non-solicitation provisions are not prohibited by the Rule, unless they are so expansive as to effectively serve as non-competes.  Even carefully drafted non-competes have often been held unenforceable by the state courts reviewing them; thus, strong confidentiality and non-solicitation provisions are key components of an employer’s protection of its competitive position.  Should the Rule survive court challenges and become effective, well drafted confidentiality and non-solicitation provisions will become even more important. 

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Law Office of Edward Scharfenberg, LLC. By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome.