In breaking news that will surprise … absolutely no one, a federal judge ruled yesterday that the FTC overstepped its authority when it issued a sweeping national ban on non-compete agreements. The decision came out of Texas – aka the state where all federal rules go to die. The judge wrote: “In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule and that the Rule is arbitrary and capricious. Thus, the FTC's promulgation of the Rule is an unlawful agency action." POOF! And with that, the ban is no more.
The FTC is allegedly “seriously considering a potential appeal.” I guess that means that they definitely might appeal? Ha! Good luck. That will be an uphill battle, particularly in light of the Supreme Court’s decision this summer in the Loper Bright Enterprises v. Raimondo case. In that decision, the Supreme Court reversed years of precedent and severely limited federal agencies’ rulemaking authority.
While this is certainly good news for businesses that depend upon restrictive covenants to protect their business from poaching former employees, you’re not entirely off the hook. In fact, things may be more complicated. The elimination of the federal rule means that we revert to the patchwork of state rules. Dolly Parton might describe it as a “Coat of Many Colors.” For businesses that operate in different states, that may mean that they require a different agreement for each state. Some states completely ban non-competes (e.g., California, Minnesota, North Dakota, Oklahoma). Others have very strict limitations on when, where, and how restrictive covenants can be used. Finally, there are some states where it’s a free-for-all.
As with the patchwork of sick leave laws across the country, the rules relating to restrictive covenants change very frequently. If you fail to have a proper agreement, you place your company at risk. This is not the time to cross your fingers and use your Google law degree to find a restrictive covenant agreement that “seems ok.”
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