The long awaited collision between the Federal Trade Commission (FTC) and the varied political and legal opinions on the legality of Employment Non-Compete Agreements (Non-Competes) is now moving up the ladder of jurisprudence in the Federal Courts. It is also being reviewed in State Legislative bodies. There will undoubtedly be circuit court conflicts and a likely need one day for a Supreme Court ruling. In a huge ruling this week, a Texas Federal Court has now issued a nationwide injunction against the near complete ban on Non-Competes imposed by the FTC. This will have major implications in the world of employment law and trade secret/IP law, and will create uncertainty in the corporate sector which is already struggling with lots of litigation relative to employment restrictive covenants, trade secret misappropriation under the DTSA, and the corporate struggle to protect proprietary information and human talent from employee departures and from a host of malicious actors on the internet. See the FTC Ban on Non-Competes here at 16.C.F.R.§ 910.1–.6
The Ryan LLC v. FTC Court per Hon. Ada Brown Enters Nationwide Injunction
While it is hard to pick winners and losers from this Texas ruling, one could assume that many businesses across the nation are cheering what appears to be a major court victory for businesses. The United States District Court for the Northern District of Texas has struck down the Federal Trade Commission’s (FTC) controversial and recently enacted "Non-Compete Rule" which was intended to ban essentially all Non-Compete Agreements. The court granted summary judgment to Ryan, LLC, which was the first to challenge the rule’s legality. The decision, which has nationwide effect, means the rule will not take effect on its planned start date of September 4, 2024. Ryan LLC and US Chamber of Commerce et al. v. Federal Trade Commission (FTC)
The FTC's rule, proposed in January 2023, sought to categorically ban non-compete agreements between employers and employees, deeming them an unfair method of competition. The agency argued that such agreements unlawfully restrain trade by limiting workers’ mobility and innovation. The proposed rule reflected the FTC’s more aggressive stance under the Biden administration to allegedly promote competition in the labor market.
The FTC’s rule would have retroactively invalidated over 30 million existing employment contracts and preempted the laws of 46 states. It sought to impose a near-total ban on non-compete clauses, which are provisions in employment contracts that restrict where and how an employee can work after leaving their current job.
Ryan LLC and the U.S. Chamber of Commerce Challenged the Authority of the FTC
Ryan, LLC, along with a group of trade associations led by the U.S. Chamber of Commerce, argued that the FTC exceeded its authority and acted arbitrarily in issuing the rule. The Court Wrote:
"Ryan asserts the following causes of action against the FTC based on the Administrative Procedure Act (“APA”), which empowers a reviewing court to hold unlawful and set aside certain agency action(s), findings, and conclusions. 5 U.S.C. § 706(2). Specifically, Ryan asserts the FTC’s actions were unlawful because (i) the FTC acted without statutory authority; (ii) the Rule is the product of an unconstitutional exercise of power; and (iii) the FTC’s acts, findings, and conclusions were arbitrary and capricious. (See ECF No. 22 at 21–30). Ryan further asserts a claim under the Declaratory Judgment Act, challenging the Rule as unlawful. (See ECF No. 22 at 30–32)."
Further, Judge Brown reported on the claims by the intervenors Chambers of Commerce:
"Similarly, Plaintiff-Intervenors argue that the Rule exceeds the Commission’s statutory authority for three reasons:
(i) the FTC Act does not authorize the Commission to issue substantive unfair-competition rules,
(ii) categorically prohibiting all worker noncompete agreements as “unfair methods of competition” cannot be squared with the meaning of that phrase in Section 5 of the FTC Act, and
(iii) the Commission lacks statutory authority to retroactively invalidate millions of existing contracts. (ECF No. 169 at 11–12).
Plaintiff Intervenors further assert that the Non-Compete Rule is arbitrary and capricious for three reasons:
(i) the FTC offers no evidence to support its categorical ban on non-competes,
(ii) the Commission unjustifiably dismissed alternatives that would have allowed the Commission to achieve its purported objectives at lower cost, and
(iii) the Commission relied on a flawed cost-benefit analysis to prop up its Rule. (ECF No. 169 at 12–13)"
The court agreed. In its Ryan v. FTC Opinion and Order, Judge Brown concluded that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g).
The court's decision to vacate the rule hinged on the FTC's statutory authority, rather than the merits of non-compete agreements. The court held that the FTC had not adequately demonstrated that non-compete agreements constitute an unfair method of competition. Under the FTC Act, the agency must conduct a thorough analysis of the competitive impact of a trade practice rule, including considering the potential benefits and tailoring the rule to address specific harms. The court found the FTC's analysis lacking on these fronts.
The court’s ruling is a significant win for businesses who rely on non-compete agreements to protect trade secrets and investments in employees. It means that existing non-compete clauses remain enforceable, and companies and workers are free to enter into new agreements. However, it is a setback for worker advocates who argue that such agreements unduly restrict employees’ ability to change jobs and negotiate better wages. The FTC will likely appeal the decision to the Fifth Circuit Court of Appeals, but for now, the rule is blocked from taking effect.
The fight over non-compete agreements is far from over. The FTC may refine its rule in response to the court’s criticism, and Congress could still enact legislation to restrict or ban non-compete agreements. As the landscape continues to evolve, businesses and workers must stay attuned to these developments and their implications for the labor market. This case highlights the important limits on federal agencies’ power and the need for them to follow the law when making rules. It also underscores the claimed value of non-compete agreements in promoting innovation and fair competition. As the legal landscape around non-competes continues to evolve, businesses and workers must stay informed about their rights and options.
Growing Political Opposition to Non-Competes State by State: Is there a need for a Federal Law Like the DTSALaw®?
There is clearly a growing political opposition to the proliferation of non-compete agreements in certain states. Just as the Federal Government stepped in to try to make Trade Secret Law consistent nationwide by enacting the DTSA in 2016, the congress may decide to do the same with employment restrictive covenants. California for example has long disfavored and regulated against non-competes in the employment context and like many California legal initiatives, those concepts tend to work their way across the rest of the country for debate, legislation and regulation if there is political support. California for example, has not only banned most non-competes, but has recently strengthened its laws to allow employees to sue their employer for imposing or attempting to enforce a non-compete against them, even if the non-compete was entered in another state where is was deemed legal. A prevailing employee can recover legal fees if successful. Along with California -- Minnesota, North Dakota and Oklahoma have full or essentially full bans on non-competes. Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia and Washington state prohibit noncompete agreements but with carve-outs for certain industries and or certain levels of workers for example unless the worker earns above a certain threshold. Other states have varying degrees of regulation of these laws. Our home state of Pennsylvania has started down the path of at least some bans.
In a prior blog, our IP and Employment attorney Acacia Perko (co-author herein) recently wrote about the initial injunction ruling in the Ryan v. FTC case, which case is the main subject herein. “Seismic Shift in Employment and Intellectual Property Rights: FTC’s Nationwide Ban on Noncompete Agreements” Acacia reported that Judge Brown, on July 2, 2024, issued a preliminary injunction against the FTC from enforcing its non-compete ban which was laid down by the FTC on April 3, 2024. This was the precursor to the more recent Summary Judgment ruling which is the subject of this blog. At roughly the same time, the Eastern District of Pennsylvania denied a motion for preliminary injunction against the FTC ban brought by Plaintiff in ATS Tree Services v. Fed. Trade Comm’n, Civil Action 2:2024cv01743 (E.D. Pa Jul. 23, 2024). There will clearly be other challenges to the FTC ban and circuit splits like these two are inevitable.
On July 17, 2024, Pennsylvania Governor Josh Shapiro signed into law legislation (HB 1633) entitled “Fair Contracting for Health Care Practitioners Act.” The Act moves forward with a plan to negate the effects of non-competes within the health care industry which “inhibit competition that benefits employees and patients and can deter needed health care practitioners from wanting to practice in Pennsylvania.” The Act is Effective on Jan. 1, 2025, and pursuant to the Act, certain noncompete covenants within employment contracts for certain health care practitioners will be impermissible. Specifically, “a noncompete covenant entered into after the effective date of this subsection, will be deemed to be contrary to the public policy and hence void and unenforceable by an employer.” For more information on the Pennsylvania ban on most health care industry non-competes, please view a recent post from our Houston Harbaugh Employment Attorney Craig Brooks at “Pennsylvania Significantly Restricts Healthcare Provider Noncompete Agreements”.
Public Policy Concerns Relating to Non-Competes;
Acacia Perko’s “Seismic Shift” blog referenced above, also focused on that EDPA decision and what is evident is that different jurisdictions will be reaching different results, and appeals to the Federal Circuit Courts are now the very likely forward path for these cases. What is at issue is a series of complicated public policy issues and questions. As mentioned above, the different states are politically all over the map on whether they favor or disfavor non-compete employment agreements or even other restrictive covenants. The core issue is the tension between a company’s right to protect its proprietary information, trade secrets and trained or acquired talent through a variety of mechanisms; Employment Contracts and Agreements, Employee Manuals, Non-Compete Agreements, Non-Disclosure Agreements; Non-Solicitation Agreements; Trade Secret Maintenance and Aggressive Protection (within the reasonable measures test in the DTSA) versus – the political and public policy opinion that there should be freedom of employment movement to foster competition and to honor individual rights.
Many states are working on what might be called a centrist position. Limitations, but not bans on non-competes. There are pending bills and proposed bills which demonstrate that there is shrinking support for non-compete agreements which restrict freedom of employee movement in the lower level of the corporate hierarchy. In other words, there appears to be ongoing support in many places for allowing non-competes and other restrictive covenants to govern employment of more senior employees and executives in a company and to restrict movement and information sharing by others if they have access to proprietary and trade secret information. Non-competes have always been subject to a reasonableness test in geographic scope and length of non-compete time. But now, the restrictions may be more nuanced and there is even growing concern that NDA’s or Non-Solicitation Agreements can be so restrictive that they function as de facto non-competes. One of the key elements of proving DTSA Trade Secret misappropriation is to prove that the alleged bad actor had "access" to the alleged trade secrets. People who are higher up in the corporate heirarchy are more likely to have such access. The same inquiry is being applied in some spaces to Non-Competes.
Companies Need to Audit Their Employment Contracts, IP and Trade Secrets
If restrictive covenants, and especially Non-Competes are banned or diminished, the importance of trade secret and other IP protection will rise. Companies and their legal counsels will need to perform the equivalent of an IP Audit with regard to their restrictive covenant agreements and trade secret inventory. All employment agreements should be reviewed in light of the state or federal law which governs the particular agreement(s) to determine current compliance with law. They should be reviewed as well for whether appropriate contractual "consideration" was given to the employee who signed the agreement and to determine the likelihood that they would withstand scrutiny under a reasonableness test for geography and scope. Perhaps more importantly, there will likely be a need to enforce trade secret protection under state law or the DTSA Federal Statute (as part of the Economic Espionage Act) and that requires first, that a company performs an audit of what it considers to be its trade secrets and to then properly educate critical employees about protection of those secrets. This analysis will require companies to evaluate the efficacy and legality of its efforts to protect the secrecy of its trade information and to decide whether it’s strategy for trade secret protection will pass muster under the “reasonable measures” test in the DTSALaw® and most state trade secret statutes. All of this requires affirmative action and not simply a passive wait and see approach that causes analysis only after a departing employee files suit to declare an employment agreement null and void, or a declaratory judgment action seeking a declaration that information is not trade secret protected.
DTSALaw® is a Federally Registered Trademark of Houston Harbaugh, P.C. in Pittsburgh, Pa.
