Category: FTC Non-Compete Rule
Clear ResultsFTC Non-Compete Rule
Texas Court Blocks Enforcement of FTC Non-Compete Ban
The Federal Trade Commission (FTC) will not be able to enforce its proposed rule banning non-competes per the latest ruling from a federal district court in Texas. What does this mean for businesses? For now, it’s business as usual. Companies can continue using non-compete agreements with their employees, provided they comply with applicable state and local laws. Best practices regarding non-compete agreements Companies should still exercise caution, however. The FTC may appeal the Ryan decision or there could be other legal or regulatory changes that could impact the enforceability of non-compete agreements. Future legislation or regulatory reform around the use of employee non-competes may be especially likely, given the recent and widely publicized scrutiny. Employers should review their existing non-compete agreements with employment counsel to ensure they comply with current laws and regulations in the states in which they operate and have employees. Attorneys experienced with non-competes and other restrictive covenants can provide you with valuable insights and alternative strategies to protect your interests. Being prepared to adapt your policies in response to any changes will help safeguard your business. Background Ryan LLC v. Federal Trade Commission, 3:24-cv-00986, (N.D. Tex.) was one of several lawsuits filed to challenge the FTC’s proposed rule banning non-competes. This rule, set to take effect September 4, 2024, would have banned the use of future non-compete agreements and nullified most existing ones. In a victory for employers, U.S. District Judge Ada Brown for the Northern District of Texas issued a ruling in the Ryan case on August 20, 2024, blocking the FTC from enforcing its proposed non-compete rule.
August 21, 2024
Labor and Employment
Navigating the FTC’s New Non-Compete Rule: Steps to Prepare by September 4, 2024
On April 23, 2024, the Federal Trade Commission (FTC) approved a new rule (FTC Rule) that invalidates most existing non-compete agreements for employees at for-profit businesses, except for those agreements for "senior executives" signed before September 4, 2024 (Effective Date). This FTC Rule fundamentally alters the longstanding practice of using non-compete clauses to safeguard an employer's interests. Overview of the FTC’s New Non-Compete Rule and Its Implications Under the new rule, non-compete agreements will only remain enforceable for senior executives—defined as those earning more than $151,164 annually and holding significant policy-making roles, such as president or CEO—and will remain enforceable if signed before the Effective Date. After September 4, 2024, employers will be prohibited from imposing non-compete agreements on new hires, even if they are senior executives. Employers are also required to inform both current and former employees bound by non-compete agreements that these agreements will not be enforced. The FTC has provided model language for this notice, available on its website in multiple languages. Employers should use this notice carefully and avoid issuing it to senior executives who the FTC Rule does not impact. Key points to consider: The term “worker” is broadly defined and includes employees, independent contractors, interns, volunteers, apprentices, and even sole proprietors. The FTC’s jurisdiction generally does not cover non-profit organizations, banks, savings and loan institutions, federal credit unions, common carriers, and air carriers, so the rule may not apply to these sectors. The rule does not address non-compete agreements that prevent employees from soliciting customers or other employees unless these agreements are overly broad and interfere with a worker’s ability to seek or accept new employment. Agreements designed to protect trade secrets and confidential information, such as non-disclosure agreements, remain enforceable. The FTC Rule does not apply to non-compete agreements related to the bona fide sale of a business entity and does not affect any pending enforcement actions pertaining to non-competes established before the Effective Date. The rule applies to post-employment non-compete agreements and does not impact agreements that limit competitive activities during employment. The FTC Rule overrides conflicting state laws but does not supersede state laws that provide greater protections, such as California’s comprehensive ban on non-competes for all employees, including senior executives. Current Legal Challenges to the FTC Rule It is no surprise that several federal lawsuits have been filed to challenge the enforcement of the FTC Rule. In one case, ATS Tree Services, LLC v. FTC, the U.S. District Court for the Eastern District of Pennsylvania ruled that the plaintiffs were unlikely to succeed in their claims against the FTC and denied their request for a preliminary injunction to halt the rule’s enforcement. Consequently, it is reasonable to anticipate that the ATS court may ultimately support the FTC’s position. In contrast, in Ryan LLC v. Federal Trade Commission, the U.S. District Court for the Northern District of Texas issued a limited preliminary injunction preventing the enforcement of the FTC Rule against the plaintiffs and intervenors involved in that case. The Ryan court is expected to decide by August 30, 2024, whether to grant a nationwide permanent injunction, just before the FTC Rule is set to take effect. Additionally, on June 21, 2024, Properties of the Villages, Inc. v. Federal Trade Commission was filed in the Middle District of Florida before Judge Timothy J. Corrigan. The plaintiff is seeking a preliminary injunction against the FTC Rule as it applies to them and an order to vacate it entirely under the Administrative Procedure Act. Judge Corrigan is scheduled to hear arguments on the motion for a preliminary injunction on August 14, 2024. Recommended Action for Businesses Before the FTC Rule Takes Effect Businesses should be prepared to act by the Effective Date. Despite ongoing litigation challenging the FTC Rule, no nationwide injunction has been issued, so employers should proactively: Strengthen other restrictive covenants (e.g., non-solicitation clauses) and develop strategies to address potential risks associated with the rule. Consider how the rule might impact valuations in mergers or acquisitions due to the potential for increased competition. (Note that the FTC Rule does not apply to non-compete clauses related to the bona fide sale of a business, a person's ownership interest in a business, or substantially all of a business's operating assets.) Evaluate options for updating or introducing agreements for senior executives before the Effective Date. Review and analyze the impact of the FTC Rule on existing non-compete agreements. Plan for issuing the required notices to affected employees and former employees. Offit Kurman has a dedicated practice group focused on issues related to employee mobility, including restrictive covenants and trade secrets. Our attorneys are uniquely positioned to guide you through these challenges, helping you weigh the risks specific to your business and make informed decisions that align with your business objectives. The information contained in this document is intended for informational purposes only. It should not be relied upon or construed as legal advice. 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August 13, 2024
Labor and Employment
Federal Court Denies ATS Tree Services' Bid to Delay FTC Rule Implementation
On July 23, 2024, U.S. District Judge Kelley Brisbon Hodge, serving the Eastern District of Pennsylvania, rejected ATS Tree Services LLC’s request to delay the Federal Trade Commission’s (FTC) final rule, set to take effect on September 4, 2024. ATS also sought a preliminary injunction against the rule. Still, Judge Hodge also denied this request, concluding that ATS had not shown that the rule would cause irreparable harm or that it could establish a likelihood of success on the merits. This decision followed shortly after U.S. District Judge Ada Brown of the Northern District of Texas issued a preliminary injunction blocking the FTC from enforcing the rule against Ryan, LLC, a tax preparation company, and certain intervenors. Judge Hodge’s denial of ATS's motion was based on a determination that ATS had failed to prove it would suffer irreparable harm because of the rule. The court found that ATS’s claims of irreparable harm—such as nonrecoverable compliance costs and the potential loss of contractual benefits— were based upon either a choice or a “speculative risk,” which did not rise to the level of irreparable and immediate harm required for an injunction. The court cited Third Circuit precedent, stating that nonrecoverable compliance costs, such as monetary losses or business expenses, do not constitute irreparable and immediate harm required for an injunction. Additionally, the court held that ATS offered no binding precedent to support its argument that the loss of contractual rights is an irreparable harm, reiterating that such determinations must be on a case-by-case basis. Even if ATS could establish irreparable harm, the court found that it had not demonstrated a likelihood of success on the merits. Judge Hodge’s opinion included a detailed analysis of the FTC’s authority to issue substantive rules regarding unfair methods of competition. The court confirmed that the FTC has such authority, noting that Section 6 of the FTC Act does not limit the FTC to procedural rules alone. The use of the term "prevent" in Section 5 of the Act supports the FTC's ability to make rules to prevent harm before it occurs rather than merely remedying it. The court also referenced prior circuit court decisions and Congressional actions, such as the Magnuson-Moss Act, which affirmed the FTC’s rulemaking authority. The court also addressed ATS’s other challenges to the rule. It upheld the FTC’s authority to broadly regulate non-compete clauses as unfair methods of competition, rejected claims that regulation of non-competes is solely a state matter, and found that the Major Questions Doctrine does not apply to the rule. Additionally, the court dismissed ATS’s nondelegation challenge, affirming that Congress had provided a clear guiding principle for the FTC’s rulemaking authority under the FTC Act. Given these findings, the court did not need to evaluate the balance of equities or public interest considerations. This ruling is significant for several reasons. It contrasts with the earlier decision in Ryan LLC v. Federal Trade Commission, where Judge Brown granted a preliminary injunction, suggesting the plaintiffs would likely succeed on the merits. The Texas court has indicated it will decide on the enforceability of the FTC rule by August 30, 2024. While Judge Hodge’s decision represents a victory for the FTC, it may be temporary. The Texas court’s preliminary injunction in Ryan LLC hinted at potential future invalidation of the rule based on arguments that the FTC lacked statutory authority or that the rule was arbitrary and capricious under the Administrative Procedure Act (APA). If the Texas court rules against the FTC, it might vacate the rule entirely or issue a permanent injunction, though the specifics are yet to be determined. In the meantime, businesses should continue to assess and document their use of non-competes and explore alternative protections like non-disclosure agreements, invention protection, non-solicits, training repayment programs, garden leaves, and non-competes related to business sales. The FTC’s guidance suggests that if properly structured, these alternatives should comply with the new rule. Additionally, state legislation and actions by other federal agencies, like the National Labor Relations Board (NLRB), may further influence the legal landscape regarding non-competes.
August 7, 2024
Labor and Employment
Texas Court Blocks FTC Non-Compete Rule: What It Means for Businesses
On July 3, 2024, a federal district court in Texas took a significant step, temporarily blocking the Federal Trade Commission's (FTC) proposed rule banning non-competes. U.S. District Judge Ada Brown for the Northern District of Texas granted the motion for preliminary injunction filed by plaintiffs Ryan LLC and plaintiff-intervenors U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, effectively putting the FTC’s rule on hold for the named plaintiffs. Although the stay is temporary pending the court’s final decision on the merits of the case and applies only to the movants, it signals that a permanent and nationwide injunction is likely. Background on the FTC's Non-Compete Rule As a quick refresher, in April 2024, the FTC narrowly passed a rule along party lines intended to ban future non-compete agreements and nullify most existing ones. The FTC asserted its authority to enact this rule under Section 6(g) of the FTC Act, claiming it grants the power to establish substantive rules against unfair competition. Set to take effect on September 4, 2024, the rule would prohibit all new employment-related non-competes and invalidate nearly all existing ones. Ryan LLC and others immediately challenged the rule in court on various grounds. Judge Ada Brown's Ruling on the FTC Rule Judge Ada Brown, a former President Trump appointee, ruled in favor of the plaintiffs, determining that they successfully demonstrated all the necessary criteria for a preliminary injunction: (i) a strong likelihood of winning the case; (ii) a significant risk of irreparable harm if the injunction wasn't granted; and (iii) a favorable balance of the potential harms and benefits to both parties. Judge Brown’s opinion focused on two key points: The Scope of the FTC’s Authority: The court’s determination that the FTC lacked statutory authority to enact the rule is significant, particularly considering its alignment with the "major questions" doctrine. Historically, the FTC has disclaimed such power, but Congress has not expressly granted it. The court's reasoning aligns with the recent trend of limiting agencies' authority, echoing concerns in the "major questions" doctrine. Whether the Rule is Arbitrary and Capricious: Judge Brown ruled that the rule was arbitrary and capricious under the Administrative Procedure Act (APA) due to its overbroad nature and lack of supporting evidence. The opinion noted that no state has enacted a ban as broad as the one proposed by the FTC, and the FTC failed to justify its sweeping approach or consider less disruptive alternatives. Additionally, the court agreed that the rule would cause irreparable harm to the plaintiffs' businesses and that the balance of equities favored maintaining the status quo. Current Status and Potential Developments of the FTC Rule While the injunction only applies to Ryan LLC and the U.S. Chamber of Commerce (and not its members), no entities will be subject to enforcement before the rule's intended effective date of September 4, 2024. Additionally, Judge Brown indicated that she intends to issue a final ruling by August 30, 2024, which could invalidate or permanently enjoin the rule. In the interim, the parties will further brief the merits issues and the narrow scope of the court’s order, including whether the injunction should be expanded nationwide. A separate challenge brought by ATS Tree Services LLC is pending in Pennsylvania, with a hearing scheduled for July 10, 2024, potentially resulting in a nationwide injunction 1. This underscores the potential nationwide impact of the ongoing legal proceedings. Impact on FTC's Rulemaking Authority This ruling is a significant setback to the FTC's agenda to expand its rulemaking authority and regulate labor markets. It reflects a broader trend of constraining administrative agencies following the Supreme Court's recent decision (issued June 28, 2024) in Loper Bright Enterprises. In Loper Bright, the court overruled Chevron’s deference. It concluded that courts must interpret statutes de novo, and agency interpretations are not entitled to deference. The court found that even where a statute is “ambiguous,” there is a single “best reading” of the statute that courts, not agencies, are responsible for determining. Previously, courts often deferred to agencies under the Chevron doctrine if their interpretation of an ambiguous law was reasonable. However, Loper mandates that courts independently assess whether an agency acted within its authority, regardless of statutory ambiguity. This means the Ryan court's final decision will heavily depend on its own interpretation of the FTC's statutory power. Given this new precedent, it is plausible to expect the FTC's rule may be overturned, at least in part. The business community, which has strongly opposed the rule, likely sees this as a positive sign. However, state-level efforts to limit non-competes continue, and the National Labor Relations Board (NLRB) has taken the view that the proffer, maintenance, and enforcement of non-competes generally violate the National Labor Relations Act 2. Proactive Review of Non-Competes: Alternative Strategies Businesses are advised to proactively review their use of non-competes across their organization and explore alternative strategies to safeguard their interests. These alternatives include: Non-Disclosure Agreements (NDAs) Intellectual Property Protection Non-solicitation agreements Training Reimbursement Programs Garden Leave Clauses Non-Competes Linked to Business Sales The FTC has indicated that, when properly structured, these alternatives should not violate its proposed rule. _____________________________________________ 1 ATS Tree Services, LLC v. FTC, No. 2:24-cv-1743 (E.D. Pa. 2024). 2 On June 13, 2024, an administrative law judge for the NLRB held that certain non-compete and non-solicit covenants violated an employee’s labor rights under the NLRA. See J.O. Mory, Inc., 25-CA-309577, 25-CA-336995, JD-36-24 (2024).
July 10, 2024
Labor and Employment
FTC's Final Rule: Understanding the Ban on Non-Compete Clauses
On April 23, 2024, the United States Federal Trade Commission (FTC) announced its final rule on non-competition clauses, voting 3-2 to adopt the final regulations, known as the “Non-Compete Clause Rule.” This rule marks a significant milestone, establishing a comprehensive ban on non-compete agreements. The decision comes fifteen months after the FTC released its proposed rule in January 2023. The final rule will not take effect until 120 days after publication in the Federal Register, and lawsuits have already been brought challenging the authority of the FTC to issue such a broad rule. Nonetheless, it is crucial for employers to understand the broad requirements, the exceptions, and how to protect legitimate business interests in the wake of the FTC’s rule. The rule applies to all businesses and individuals within the FTC’s jurisdiction, which covers all types of companies in nearly all industries. However, certain entities fall outside the FTC’s jurisdiction and, therefore, are exempt from the ban. These include banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits. The rule restricts businesses and individuals from including non-competition language in future employment agreements, policies, handbooks, or websites for their workers. Additionally, it extends to non-solicitation and confidentiality agreements that function as de facto non-competition agreements. Importantly, this prohibition applies to all workers (not just “employees”), including independent contractors, interns, externs, volunteers, apprentices, and others. According to the rule’s preamble, “it is an unfair method of competition—and therefore a violation of section 5—for employers to, inter alia, enter into non-compete clauses with workers on or after the final rule’s effective date.” Once the rule takes effect, agreements and policies containing non-compete language will become unenforceable, with the only exception being for “Senior Executives.” The rule defines “Senior Executives” as a worker earning more than $151,164 annually and holding a “policy-making position.” Compensation can include salary, commissions, performance bonuses, and any other agreed-upon forms of compensation, excluding benefits or board and lodging. If the individual only worked part of the year, their earned compensation can be annualized to determine whether they meet the threshold. Policy-making positions include the president, CEO, or individuals with authority to make company-wide policy decisions. While “Senior Executives” will not have their non-competes retroactively voided like other workers, the rule prohibits covered businesses and individuals from entering into such agreements with future workers, even if they qualify as “Senior Executives.” Once in effect, the rule will also require businesses and individuals to notify workers of the ban and rescind existing non-competes (except those with senior executives). Model language for an appropriate notice can be accessed at Noncompete Rule | Federal Trade Commission (ftc.gov). Consequently, the bulk of existing restrictions will become unenforceable upon the rule’s enactment. The FTC anticipates the rule will increase employee earnings by at least $400 billion over the next decade. While the rule fundamentally prohibits all non-compete agreements between businesses and their workers, exceptions exist for non-competes between businesses and between the seller and buyer of a company. Specifically, the FTC’s rule prohibits anything that restricts, penalizes, or prevents a worker from pursuing a different job or starting a business after leaving their current job. That includes: Prohibitive terms and conditions expressly saying that a worker cannot get another job, such as with a competitor or embark on a business venture; Terms and conditions mandating financial penalties for workers who get another job or start a business; or Terms and conditions that aren’t labeled as non-competes but are so restrictive that they effectively prevent a worker from getting a new job or starting a business. This may include overly broad confidentiality clauses, which could potentially violate the National Labor Relations Act, Employers are advised to seek guidance from experienced employment counsel to ensure compliance. As noted at the outset, given the extremely broad nature of the rule, legal challenges are anticipated, potentially leading to further delays or permanently preventing the rule’s enactment. We will continue monitoring developments and providing updates accordingly. In the meantime, employers are encouraged to take advantage of this period by: Evaluating and analyzing existing agreements to ensure certain protections are in place in anticipation of the rule’s implementation; and Consulting with trusted legal counsel to devise a communication strategy regarding the notice requirement for impacted workers, ensuring effectiveness and compliance with legal standards. If you have any questions or need assistance with navigating these changes, please reach out to Gabriel Celii and Sarah Goodman
April 25, 2024
