USA: FTC’s Non-Compete Ban Stayed by Court

 

On May 7, 2024, the Federal Trade Commission (FTC) published its highly anticipated and contentious edict on non-competition covenants (the “Final Rule”) in the Federal Register. Federal Trade Commission, 89 FR 38342. The rule, which bans all new non-competes and makes existing covenants invalid unless in the case of a senior executive or a bona fide sale of a business, was set to take effect September 4, 2024 (120 days after publication) but was stayed by a Texas federal court.

Ongoing Litigation: On July 3, 2024, the United States District Court for the Northern District of Texas postponed the effective date of the Final Rule. The Court is currently hearing the case filed against the FTC by Ryan LLC and its intervenors (Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce), and the judge has announced that she intends to issue a decision about whether to permanently enjoin the rule by August 30, 2024. While the current preliminary injunction applies only to the named Plaintiffs, Judge Brown’s final decision on August 30th may apply to non-parties as well under Fifth Circuit precedent. The presiding Judge requested that the parties brief the issue of nationwide application of the injunction before she issues her merits disposition. Ryan LLC v. Federal Trade Commission. There are differing opinions among experts as to whether a federal circuit court has the authority to enter a nationwide injunction, so it’s possible the case could ultimately go to the Supreme Court, leaving a nationwide stay of enforcement in the grey zone for a longer period.

Opponents of the rule argue that the FTC has exceeded its rule-making authority conveyed by the Administrative Procedure Act (APA) and intruded on an area usually legislated by state governments. They claim that non-competes safeguard companies’ trade secrets, protect them from client losses, and ultimately help workers by increasing retention of highly trained employees.

Proponents (workers’ rights organizations, etc.) claim that non-competes are exploitative, that non-disclosure and solicitation agreements are sufficient to protect businesses, and that banning non-competes will increase workers’ wages, innovation from locked up talent, and new startups.

Either Way, the Ball Bounces: Regardless of the outcome in the Texas Court, it is likely that there will be continued activity on this issue as public support for advancing workers’ bargaining positions is growing. If the Final Rule is invalidated, it’s likely that the FTC will propose a new version that more closely mirrors certain existing state laws, which limit the applicability of non-competes, for example, with salary thresholds.

Looking Ahead: Now is a good time to reassess your approach to restrictive covenants in case the Final Rule is not blocked.

• Focus non-compete requirements on categories of workers with intimate access to competitive information and relationships, and the types of covenants that protect those assets.
• Be sure covenants are narrowly tailored for enforceability based on the Final Rule’s language, and severable so that language found to be invalid will not invalidate other language.
• Since non-competes with senior executives (those with over $151,164 annual compensation and in a policy making position for the business) and those entered in the context of a bona fide sale of a business interest (requiring sufficient bargaining power in the transaction) will be grandfathered, but new ones prohibited, make sure you have those in place before the Final Rule’s new effective date (TBD).
• Stay up-to-date with the ongoing litigation surrounding the Final Rule, particularly the decision set to come August 30, 2024, and prepare to notify employees that their non-compete covenants will be unenforceable if the Court is unable to block the FTC’s non-compete ban.

Should you need assistance with any of these matters, please do not hesitate to contact our firm.

 

For further information, please contact:

Amie Carmack, Partner

Morningstar Law Group, Raleigh

e: acarmack@morningstarlawgroup.com

t: +1 919 590 0394

 

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