This past April, the Federal Trade Commission (FTC) proposed a rule (Rule) that amounted to a near total nationwide ban on employers’ use of non-compete agreements. Since its announcement, employers have actively attempted to recalibrate their approaches to non-competes in anticipation of the Rule’s September 4th effective date. In news that will be welcomed by many employers, a federal judge in Texas has now struck down the Rule nationally, only a few weeks before it was to go into effect, allowing employers across the country to continue to utilize non-compete agreements as their state laws permit.
As a refresher, non-competes are a routine provision in employment and sale of business contracts. Employers have long viewed them as necessary to safeguard client relationships and confidential business information, while employees have argued that non-competes restrain their ability to find new employment in the same or similar sectors as their previous employers.
The FTC argued that a ban on non-competes is necessary to spur economic growth and to protect workers. The agency estimates that workers’ earnings would increase by at least $400 billion over the next 10 years, and that 30 million American workers would be affected should non-competes become illegal.
The Latest Decision on the FTC’s Rule
In Ryan, LLC v. FTC, Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas (the Court) granted the Plaintiffs’ motion for summary judgment, holding that the Rule is unlawful. The Court based its decision on two factors: the FTC’s lack of authority to issue substantive, rather than procedural, rules to address unfair methods of competition and that the Rule itself was “arbitrary and capricious.”
The overall outcome of this decision means that the Rule—which affected employers across the country—was set aside. The Court may have felt emboldened to make its decision given the United State Supreme Court’s (SCOTUS) recent ruling in Loper Bright, which tossed out a decades-old Chevron doctrine giving substantial deference to the rules and decision-making of agencies like the FTC. You can read our coverage about that noteworthy decision here.
As of the publication of this article, the FTC has not yet decided on its response to the Court’s decision, but its spokesperson said the agency is considering an appeal. An appeal would be heard by the Fifth Circuit Court of Appeals, which has a reputation for being business- and employer-friendly. If the FTC is unsuccessful in its appeal at the Fifth Circuit, the next step would be to appeal the case to SCOTUS. Given SCOTUS’ recent Loper Bright decision, the FTC could expect to receive little deference from the appellate courts through appeal.
What Does This Mean for Employers?
The practical effect of the Court’s decision is that employers can maintain the status quo—meaning they can use non-competes to the extent they are permitted under state law.
However, recommendations made to employers in advance of the Rule going into effect remain prudent, and employers operating in multiple states will continue to confront a patchwork of laws limiting the use of non-competes. Accordingly, employers must:
- Stay up to date on laws and caselaw in the localities in which they do business. Some states, like California and Minnesota, have long ago banned non-competes with limited exceptions, and nearly a dozen others have passed laws that set wage thresholds for workers to be restricted by non-competes. These laws, irrespective of whether the Rule ever goes into effect, are in effect right now and may limit an employer’s ability to include non-competes in their agreements.
- Tailor employment agreements to meet the requirements of state laws and avoid a one-size-fits-all approach to non-competes.
- Consider a holistic review of employment practices and ensure that the provisions in agreements comply with local and state requirements and are designed to meet an ever-shifting set of rules for employers.
In addition, employers should be mindful of a more active National Labor Relations Board (NLRB), which has sought to chip away at practices it says violate workers’ rights, including the use of non-competes, by threatening to hold employers liable, including through financial penalties, for their purported illegal use. The Court’s decision this week notably did not preclude this kind of enforcement by the NLRB.
