FTC non-compete ban barely stands

A Texas federal district judge held July 3 that the organizations suing to block the Federal Trade Commission’s (“FTC”) Rule banning most noncompete agreements nationwide will not have to comply with the rule until the litigation is resolved. This decision raises significant questions for employers across the country, including those in New Jersey and New York.?

Understanding the Texas judge’s ruling?

The Texas judge’s decision to grant a preliminary injunction against enforcement of the FTC’s non-compete ban was based on three key criteria:?

1. Likelihood of success on the merits: The plaintiffs, a Texas business and various employer associations, demonstrated that they were likely to succeed in their challenge against the FTC’s Rule. The court noted that, while the FTC has some authority to create “housekeeping” rules preventing unfair competition, it does not have the authority to create substantive rules like the one banning most noncompete agreements nationwide. The court also labeled the rule as “arbitrary and capricious,” citing its unreasonable overbreadth.
2. Irreparable harm: The court agreed with the plaintiffs that they would suffer irreparable harm if the rule were enforced. Compliance with the rule, which the court deemed invalid, would impose significant costs on the plaintiffs, the court held.
3. Balance of harms and public interest: The court found that stopping the rule from being enforced was in the public interest, because the rule makes unenforceable longstanding contractual agreements that have been judicially recognized as lawful and beneficial to the public interest.?

Implications for employers not involved in the lawsuit?

While the preliminary injunction directly affects only the plaintiffs in the Texas lawsuit – and not even the employer associations’ members – the final ruling, expected August 30, may extend far beyond. Additionally, another similar case is pending in the Eastern District of Pennsylvania, with a ruling anticipated on July 23. These decisions could determine the future enforcement of the FTC Rule, set to go into effect September 4.?

The NLRB attacks noncompete agreements?

Adding to the complexity, the National Labor Relations Board (“NLRB”) has been actively litigating overbroad noncompete and non-solicitation provisions for non-supervisory and non-managerial employees.?

Last year, the NLRB General Counsel issued a memorandum stating that, with limited exception, any employment noncompete agreement that limits future employment interferes with non-supervisory and non-managerial employees’ “right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” This memorandum signaled the NLRB’s intent to challenge the use of noncompete agreements with “low-wage or middle-wage workers.”?

Most recently, in June, an NLRB administrative law judge ruled that “ridiculously broad” non-solicitation and noncompete provisions in an employment agreement were unlawful under federal law.?

What employers should do now?

Given the uncertainty surrounding the future enforceability of the FTC Rule banning noncompete agreements, employers should take the following steps to protect their businesses:?

1. Review existing noncompete agreements:? Assess the enforceability and necessity of current noncompete clauses in your employment and severance agreements. Ensure that they are narrowly tailored to protect legitimate business interests.?
2. Stay informed: Keep abreast of legal developments regarding noncompete agreements. Monitor decisions from the U.S. District Courts for the Northern District of Texas and the Eastern District of Pennsylvania, as well as NLRB decisions.?
3. Seek legal counsel: Consult with your employment attorney to understand how these changes may impact your business and what revisions you should make to your noncompete and non-solicitation agreements should the FTC Rule be upheld and in light of recent NLRB decisions.?
4. Pay attention to local law: Both the New Jersey and New York legislatures have proposed laws that restrict the use of noncompete agreements, including limiting the duration of the noncompete and to whom it may apply, as well as requiring compensation to the employee for the length of the noncompete period.?

To learn more, watch our video

If you need help updating your noncompete and non-solicitation agreements in light of the FTC Rule and the NLRB’s actions, schedule a strategy session with us today.?

Federal agencies hit employers hard?

This article is for informational purposes only. It is not offered as legal advice, nor is it intended to create an attorney-client relationship with any reader. Consult with competent local employment counsel to determine how the matters addressed here may affect you.?