Harvey Linder: Update on the Federal Trade Commission Ban of Non-Compete Agreements

Harvey Linder: Update on the Federal Trade Commission Ban of Non-Compete Agreements

Harvey Linder from the Employment and Labor team at Culhane provides an update on the Federal Trade Commission Ban of Non-Compete Agreements.

On Wednesday, July 3, 2024, a Federal court in Texas set off its own brand of Independence Day fireworks.  It partially, temporarily, but not surprisingly, blocked the government’s ban on non-compete agreements that was set to take effect on September 4, 2024.

Ryan LLC (“Ryan”), a tax services firm headquartered in Dallas, had sued to block the rule just hours after the Federal Trade Commission (“FTC”) voted  to ban non-competes for almost all U.S. employees earlier in April.

Originally, the U.S. Chamber of Commerce filed its own lawsuit against the FTC in a separate federal court in Texas, but eventually joined Ryan’s case.  Notably, other similar lawsuits were also filed against the FTC.

Writing for the U.S. District Court for the Northern District of Texas, Judge Ada Brown held that “The Court grants the motion for preliminary injunction and postpones the effective date of the Rule as applied to the Plaintiffs. While this order is preliminary, the Court intends to rule on the ultimate merits of this action on or before August 30, 2024.”

The FTC argued that non-competes provide companies with contractual conditions that prevent workers from taking a new job or starting a new business.  In a curiously broad statement in its original announcement of the ban, the FTC stated that non-competes often force workers to either stay in a job they want to leave, or bear other considerable harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.  According to FTC statistics, an estimated 30 million people, or one in five American workers, are bound by non-compete clauses or agreements.

Under the FTC’s proposed ban, existing non-competes for the vast majority of workers will no longer be enforceable after the rule’s effective date.  Existing non-competes for senior executives (who represent less than 0.75% of workers) will be “grandfathered” and can remain in force under the FTC’s final rule.  (Senior executives are defined as workers earning more than $151,164 annually and who are in policy-making positions).  Employers, however, are banned from entering into or attempting to enforce any new non-competes, even if they involve senior executives.  Employers will be required to provide notice to workers other than senior executives who are bound by an existing non-compete that they will not be enforcing any non-competes against them.  To assist employers’ compliance with this requirement, the FTC included model language in the final rule that employers can use to communicate appropriately to workers.

In its complaint, Ryan accused the FTC of overstepping its statutory authority in declaring all non-competes unfair and anticompetitive.  The FTC had determined that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into non-competes with workers and to enforce certain non-competes.  The tax services firm argued that the FTC did not have authority to promulgate such a broad policy.

Further, Ryan argued that the ban on non-competes would inflict “serious and irreparable injuries” on its business, including by putting its confidential information at risk, and enabling its competitors to poach valuable employees, whose knowledge and training would exit and go to its competitors.

Across the country, many businesses large and small joined in opposition to the new rule.  A separate, but similar, case brought by ATS Tree Services, a small Pennsylvania tree care provider, is scheduled for a Hearing on July 10th.

The Texas ruling is far from the final word on the non-compete rule.  As the wheels of justice grind slowly, the case will continue to make its way through the appeals process. Most likely, this legal journey that could take months if not years to conclude.

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