The Federal Trade Commission's rule banning nearly all non-compete agreements with workers was blocked, nationwide, by a Texas federal court on August 20, 2024. The court's decision found that the rule exceeded the FTC's statutory authority and that it was arbitrary and capricious. The non compete rule is now entirely set aside and will not take effect on September 4, 2024, as was previously anticipated.
Specifically, the Texas court's opinion found that (i) the statutory provision invoked by the FTC to issue the rule, Section 6(g) of the FTC Act, authorized only procedural rulemaking and not substantive rulemaking like the non-compete ban; and (ii) the rule was arbitrary and capricious under the Administrative Procedure Act, 5 U.S.C. § 706(2), because the FTC disregarded evidence of positive benefits of non-compete agreements and failed to consider less restrictive alternatives to a sweeping nationwide ban. In an earlier ruling in the same case, Ryan LLC et al. v. Federal Trade Commission, No. 3:24-cv-00986-E (N.D. Tex.), the court entered a preliminary injunction with respect only to the named plaintiffs, leaving uncertainty for all other employers. After considering the merits and arguments raised in cross-motions for summary judgment, the court's August 20 opinion is now a final ruling with nationwide effect.
The future of the FTC's non-compete rule looks questionable, but the FTC is considering appeal options, and the legal battles are likely to continue. Litigation around the FTC rule is also continuing in other cases pending in Pennsylvania and Florida federal district courts, where the impact of the Texas ruling is still to be seen.1 The upcoming November 2024 elections add further uncertainty to the future of the FTC rule and broader antitrust policy, although candidates from both major parties have indicated that antitrust enforcement will remain a priority. If the issue ultimately reaches the U.S. Supreme Court, the FTC will face a skeptical Court. In Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, the Supreme Court recently overruled its own landmark Chevron decision, which previously held that courts should defer to federal agencies' interpretations when laws passed by Congress do not clearly answer a question arising under a statute administered by the agency. See here for Winston's earlier post about these developments.
While the Ryan decision is a major victory for employers that use non-competes and stops the FTC rule from going into effect for the time being, the future of non-competes remains uncertain. Regardless of what happens to the federal rule, state-level lawmakers and enforcers continue to scrutinize non-competes. Four states already have nearly complete bans on non-competes. Several other states have substantial limitations on worker non- compete agreements, while others are considering new restrictions or enforcement focus on non-competes. If the FTC rule is invalidated, more state legislatures and enforcers may take up the issue.
Given this uncertainty, businesses should monitor this space and assess their current agreements. It is still a good time for businesses to consider how best to future-proof their employee agreements against changing laws. Winston attorneys are carefully monitoring the developments with non competes and regularly advising clients on ways to navigate the shifting landscape.
WHAT EMPLOYERS CAN DO TO PROTECT THEIR INTERESTS WHEN WORKERS DEPART
There are many options in addition to non-competes that can help protect a company's legitimate interests when workers depart. Amid continuing uncertainty about the FTC rule and ongoing scrutiny of non-competes at the state level, it remains advisable for businesses to take stock of where they currently use non-competes and consider additional options, such as non-solicitation agreements, enhanced non-disclosure agreements, garden leaves, and training repayment programs.
Where non-competes remain available, these provisions can act as complements. And where non-competes cannot be used, these provisions can protect company interests to the fullest extent possible. In all cases, post-employment restrictive covenants will be at their strongest and most enforceable when they are tailored to clear procompetitive interests that the company wishes to protect. Companies should proactively consider when the following types of provisions are appropriate for their agreements and what information they are seeking to protect:
- Non-solicits. Non-solicits can protect customer relationships and ensure that a former employee does not take advantage of the company's relationships. Such agreements are at their strongest when tailored to specific customers or other valuable relationships in which the employee was involved at the company.
- Non-disclosure agreements (NDAs). Targeted NDAs and confidentiality agreements can help protect a company's intellectual property information or trade secrets. Additionally, information-management policies can be updated and enhanced to keep access to sensitive information limited to those employees that need to know the information and who have agreed to heightened confidentiality terms in advance.
- Garden leaves. Employers can contractually agree with employees to extend notification periods before the employee departs the company. During this notice period, employers can instruct a departing employee not to work, deny them access to confidential information, and prohibit them from communicating with customers, company employees, or other important business partners. During the garden leave, the employer continues to pay the employee their salary, but typically does not need to pay bonus or other compensation above that base salary. The FTC has recognized that such garden leaves are not a post-employment restriction on competition and are therefore explicitly carved out of the FTC's non compete rule.
- Incentives forfeitures. A wide variety of incentive award structures can be used to encourage long-term employment and reduce the likelihood that an employee will depart for a competitor. Terms that require departing employees to forfeit incentives or future compensation if they leave for a competitor can be effective while not actually prohibiting an employee from potentially competing, but such terms should be used carefully because several states, and the FTC's rule, analyze forfeiture-for-competition clauses similarly to non-competes.
- Training cost repayment programs. Training cost repayment programs aim to protect investments in training workers and require repayment of training expenses if the employee leaves the company within a certain period of time. Repayment terms should generally be tied to the company's actual costs associated with the training.
Footnotes
1 In the challenge pending in the Eastern District of Pennsylvania, the court previously denied plaintiff's motion for a preliminary injunction, and indicated it was likely to uphold the FTC rule on the merits. Meanwhile, a judge in the Middle District of Florida issued a preliminary injunction on August 15, 2024, blocking the rule as to the plaintiff in that case, but did so on a different basis than the Texas court in Ryan. The Florida court found that the FTC likely does have substantive rulemaking authority under Section 6(g) of the FTC Act, but that this particular non-compete rule was still likely unauthorized under the "major questions doctrine" due to its sweeping consequences.
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