- Northern District of Texas Imposes a Nationwide Ban Enjoining Non-Compete Ban
The FTC’s non-compete ban that was set to take effect on September 4, 2024, has been permanently enjoined by Judge Ada Brown in the Northern District of Texas. In granting the motion for summary judgment filed by plaintiff, Ryan LLC and the intervening chambers of commerce, the Court opined that the FTC in enacting the non-compete ban exceeded its authority, thereby rendering the rule unenforceable. The Court particularly noted that Section 5 of the FTC Act, which authorizes the FTC with the authority to prevent unfair competition and deceptive practices, provides for a case-by-case administrative process. Thus, the widespread rule that imposed a blanket ban on almost all private corporations went well beyond the type of enforcement mechanism imbued on the FTC by Congress. It is expected that the FTC will move to appeal the District Court’s decision.
- Florida, Texas and Pennsylvania are Split on Enforcement
Prior to the nationwide ban imposed by the Texas District Court, the District Court in the Middle District of Florida imposed a temporary ban on the non-compete ban for the Villages retirement community. Consistent with the Texas District Court’s holding, the Middle District of Florida also found that the FTC’s non-compete rule both exceeded its statutory authority and violated the major’s questions doctrine, as whether a non-compete is enforceable is typically an issue that is determined by state common law or statute. In contrast, the District Court in the Eastern District of Pennsylvania declined to impose a temporary injunction and upheld the FTC’s non-compete ban. The Texas District Court case is the first case to get to a final judgment and to impose a nationwide stay.
- How Employers Should Proceed
While the lawsuits and legal arguments may be interesting fodder for legal scholars, what this means for Employers is that:
(a) the FTC’s Non-Compete Ban will not be taking effect on September 4, 2024;
(b) Employers do not have to notify their current and former employees that any existing non-compete provisions will no longer be enforced; and
(c) Employers, subject to any state law restrictions, may continue to include reasonable non-compete restrictions as a condition of employment.
While a stay on the FTC’s Non-Compete Ban is a welcome relief to Employers, Employers should still be mindful when conditioning employment on an agreement to not compete. Whether a non-compete is enforceable will remain (for now) subject to state common and statutory law. States such as California, Colorado and Oklahoma already impose an outright ban on the use of non-competes. Other states, such as Maryland, prohibit non-competes for certain industries such as veterinarians. Additionally, most courts will only enforce a non-compete to the extent the provision is reasonable in geographic and temporal scope and is necessary to safeguard a protectable business interest such as protecting the disclosure of trade secrets or confidential information or maintaining goodwill with a business’ customers and vendors. Whether a non-compete agreement is unenforceable is determined on a case-by-case basis.
Additionally, the General Counsel of the National Labor Relations Board recently weighed in against non-competes as potentially violating employees’ Section 8 rights. This only serves to further complicate the tricky landscape that Employers must navigate when determining whether to impose or enforce a non-compete provisions.
Employers should now review any agreements to ensure that any existing non-competes comply with state common or statutory law. Additionally, with the enforceability of non-competes subject to an ever-changing landscape, Employers should consider other restrictions, such as non-solicits and confidentiality provisions, to ensure that their protectable interests are safeguarded. Further, strong IT controls protecting the flow of confidential information and trade secrets are essential both to ensure this information remains secret and to help bolster any claims to a court that this information is truly secret and must be protected.
Should you have any questions about the stay on the FTC’s Non-Compete Ban, restrictive covenants or any other employee compliance questions, the attorneys at FDT are here to assist. This client alert is provided for information purposes and is not intended to be legal advice or counsel.