FTC’s Non-Compete Ban Saga
Earlier this summer a Texas federal court blocked a new Federal Trade Commission (FTC) ban that affected employers who utilize non-compete agreements. While the court blocked the FTC’s new rule banning noncompete agreements, as of July 3, 2024, it only applied to the plaintiffs in that particular lawsuit. See Ryan, LLC v. Federal Trade Commission, 3:2024-CV-00986 (N.D. Tex. 2024).
This led to the FTC’s plans to continue enforcing the new rule that was set to go into effect on September 4, 2024. However, just in the nick of time, on August 20, 2024, the Northern District of Texas issued a Memorandum Opinion and Order, which appears to set aside the FTC’s ban on non-competition agreements. It states that the FTC’s new rule “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.” This suggests that the FTC’s new rule will no longer just apply to the plaintiffs of the underlying dispute or case in controversy, but to any employer subject to the FTC’s new rule.
While the true effects of the Memorandum Opinion and Order (August 20, 2024) are yet to be seen, it is worth noting that, generally, an order and memorandum opinion from a district court is only binding for the case within that court. However, the court ordered that the FTC rule be set aside, which may mean the FTC cannot enforce the rule against any other employers. Depending on what impact this Memorandum Opinion and Order (August 20, 2024) produces, it could be the difference between a valid and an invalid contract for an estimated 30 million contracts.
While this seems to be a positive development for Texas employers, it is valuable for all employers to understand the possible impact that a ban on non-compete agreements could have for their business. It is likely that the FTC’s new rule will run its course through the appellate courts. There may end up being a circuit split, which means the Supreme Court might ultimately have to resolve it.
Impacts on Texas Employers
Noncompetition agreements are generally implemented to protect employers in the long run. While the average noncompetition agreement certainly ensures a few benefits to employers by protecting the company’s trade secrets, maintaining the company’s market position, and by reducing high turnover rates by incentivizing employees to stay in their current position, it doesn’t come without a cost. On the flip side, enforcing these agreements can be costly if an employee violates his or her agreement, or it can potentially deter new employees from joining a company due to the fear of restrictions of their future employment opportunities.
But with the possibility of a non-competition agreement ban looming on the horizon (slated for September 4, 2024), employers may have questioned what this means for their existing agreements with employees and how this noncompetition ban could impact them.
The FTC’s New Rule
While the block on the FTC’s rule to ban noncompetition agreements certainly maintains the status quo for the plaintiffs in the underlying case, it seems the court seeks to provide the same for all employers. If the non-compete ban were capable of being enforced by the FTC, restrictions would be lifted regarding how employees move from employer-to-employer. Without fear of legal repercussions, former employees (no longer restricted by noncompetition agreements) would be free to move from position to position amongst competing employers, carrying with them significant knowledge of trade secrets and industry/specific company know-how. Additionally, employers may see an increase in existing employees seeking to renegotiate the terms of his/her employment.
The Fight to Preserve the Status Quo
The underlying case, which sought to preserve the status quo and combat the FTC’s noncompete ban—Ryan, LLC v. Federal Trade Commission—was brought by Ryan LLC and two Texas trade associations, with support from the U.S. Chamber of Commerce. In their suit, the plaintiffs argued that the FTC exceeded its authority with the new rule and that enforcing the rule would significantly harm businesses by risking the exposure of trade secrets and facilitating employee poaching by competitors.
Initially, the judge presiding over the case granted the preliminary injunction based on three main arguments:
FTC’s Authority: The court found that the FTC overstepped the authority granted to it under the Federal Trade Commission Act of 1914. According to Judge Brown, the states have historically regulated restrictive covenants, and the FTC typically had been tasked only with procedural rule-making authority, rather than implementing substantive changes to federal law and regulations, such as a ban to non-compete agreements.
Arbitrary and Capricious Rulemaking: Judge Brown found that the FTC’s justification for the rule was “without reasonable explanation” because the agency failed to provide sufficient supporting evidence or consider potential alternatives to the rule.
Irreparable Harm: The plaintiffs successfully demonstrated that the rule would cause them significant, irreparable harm, including the costs required to restructure existing non-compete, nondisclosure, and non-solicitation agreements.
The court, in its Memorandum and Opinion (July 3, 2024), agreed with the plaintiff’s argument and ruled that “the FTC lacked the authority to create substantive rules through this method” and that “the Rule is arbitrary and capricious.”
Recommendations for Employers
Given the current legal environment following the Memorandum Opinion and Order (August 20, 2024), Texas employers should refrain from making immediate changes to their non-compete agreements and other restrictive covenants. Instead, employers should celebrate the court’s ruling, while continuing to exercise their best judgment and care when utilizing non-compete agreements. It is always prudent to review these agreements thoroughly to ensure they comply with existing state laws and consider potential adjustments in light of the ongoing litigation.
Beyond ensuring non-compete agreements and other restrictive covenants comply with federal and state laws, employers need to understand that this recent ruling highlights the evolving legal landscape regarding employment agreements and the balance between protecting business interests and employee rights. Employers should stay informed about further developments in this case and potential changes in federal and state regulations to ensure compliance and protect their interests effectively.
Our team at Weygandt Law can guide you in making the difficult decisions you face every day as a leader in business, including when and how to execute legally binding contracts. We can help look out for your business’s future, so you have time and energy to focus on growth and expansion. Give us a call at (713) 489-5900 or email us at info@weygandtlaw.com to learn how we can support you and help build solid legal frameworks for your business empire.
