UPDATE: The Noncompete Lives (For Now)

Hi! I’m hosting an in-person seminar on estate planning called “How to Keep Your Family Out of Court & Conflict on Thursday, September 12, 2024 at 4:00pm. It’s being hosted at FLCBank, located at 241 SW 7 Terrace, Gainesville, Florida 32601. To register call (352) 224-9811 or click here: https://tealacre.lpages.co/webinar/

With that out of the way, let’s get to the article!

The Story So Far

Back in July, we gave an update on the Noncompete Rule, an almost total ban on Noncompetes by the Federal Trade Commission (the “FTC”), their reasoning behind the Noncompete Rule, and the lawsuits that had been filed by businesses and lobbying groups to stop the Noncompete Rule from going into effect.

To provide a brief background on Noncompetes and the FTC’s position. Noncompetes are a type of restrictive covenant, which is an agreement to not do something. In the case of a Noncompete, it’s an agreement to not compete against an employer for a set amount of time after you stop working for them. Laws on Noncompete vary by state, some ban them outright under state law others will enforce them gladly. Those in support of Noncompetes say they’re essential to protecting an Employer’s investment in their employees. The FTC and critics of Noncompetes say these restrictive covenants harm the entire labor market because they decrease competition, stagnate wages, and stifle innovation. Accordingly, the FTC promulgated the Noncompete Rule, banning Noncompetes in almost all circumstances. Since the FTC is a federal agency, all conflicting state laws would be invalidated. At the first possible instance, several lawsuits were filed to stop the Noncompete Rule from taking effect.

A Split Decision?

Since then, there have been consequential developments. At first it appeared that we were headed towards a Circuit Split, with District Courts in the Eastern District of Pennsylvania and the Northern District of Texas holding conflicting rulings. The federal court system is divided into thirteen different “Circuits.” Eleven of these Circuits have geographical boundaries covering more than one state. These Circuits have appellate courts, called the Court of Appeals, which review the decisions of District Courts, which are the courts where trials are held. If the Court of Appeals for two different Circuits reach different opinions on the same set of facts, a Circuit Split is born. And, how the federal law is applied depends on the Circuit you’re in. Circuit Splits are unfavored and usually resolved by the Supreme Court.

In July, the U.S. District Court for the Northern District of Texas had issued a preliminary injunction (a court order to stop doing or not to do something) in the case of Ryan, LLC v. Federal Trade Commission. This injunction was against the FTC, preventing it from enforcing the Noncompete Rule against the plaintiff, Ryan, LLC, and only the plaintiff. The preliminary injunction did not decide any legal issues but was granted because the court found it was very likely that the FTC would lose the case. Later, in ATS Tree Services, LLC v. FTC, the U.S. District Court for the Eastern District of Pennsylvania ruled that the FTC had the proper authority to make and enforce the Noncompete Rule, and so, did not grant ATS Tree Services, LLC’s, the plaintiff in that case, request for a preliminary injunction.

The Northern District of Texas: “I Am the Decider.”

With the conflicting court decisions and Noncompete Rule scheduled to take effect on September 4, 2024, there was confusion among the public as to whether they should comply with the Noncompete Rule. However, those concerns have been resolved. On August 20, 2024, Judge Ada Brown of the District Court of the Northern District of Texas, who had previously issued the preliminary injunction, ruled that the FTC “lacks substantive rulemaking authority with respect to unfair methods of competition.” She also found that “[t]he role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.” In line with this rationale, Judge Brown decided to compliment her ruling with a nationwide injunction against the FTC prohibiting enforcement of the Noncompete Rule.

Due to the ruling out of the U.S. District Court for the Northern District of Texas, the FTC cannot enforce the Noncompete Rule. That does not mean that all Noncompetes are invalidated. It means that state law will continue to decide whether a Noncompete is enforceable. So, if you live in California, where Noncompetes are banned by state law, they will still be unenforceable on September 4, 2024. However, if you live in a state like Florida, where Noncompetes are enforceable, you won’t have to worry about any changes taking effect.

Is the FTC Out of Options?

Appealing the Ruling

The FTC has mentioned they are considering appealing the ruling. However, that would be an uphill battle that would take years to complete. First, they’d need to appeal to the Fifth Circuit Court of Appeals, which like the U.S. District Court for the Northern District of Texas, would likely have a “pro-business” point of view towards the FTC’s rulemaking authority with respect to unfair competition. Meaning, the FTC would likely lose on appeal at the Circuit Court level and would then have to appeal to the Supreme Court. If the Supreme Court decided to hear the case, the current conservative supermajority would likely have a “pro-business” point of view towards the FTC’s rulemaking authority with respect to unfair competition and would decide the case against the FTC. Since the Supreme Court is the highest court in the land, there would be no other court for the FTC to appeal to.

An Act of Congress

In her ruling, Judge Ada Brown states “[t]he role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.” This implies the existence of another way to make the Noncompete Rule effective: Congress passing a law explicitly granting the FTC rulemaking authority with respect to unfair competition. Whether the FTC can get this grant of Congressional authority would likely depend on the outcome of the election in November, with each political party having a strong position as to the Noncompete Rule. Still, if the right party wins, and can get a law passed, the FTC could have another option to enforce the Noncompete Rule.

Get the Business Guidance You Deserve with TealAcre

This is likely the end of the Noncompete issue for the foreseeable future. Thank you for taking this journey with us. If you’re considering a Noncompete, reach out to TealAcre to get the guidance you need. Don’t leave it to chance, or an online D.I.Y option, or the cheapest lawyer you can find! You read this far because you’re care about your business. And, you care about your business because it’s how you provide for your family, acquire your assets, take care of your employees. Instead of going at it alone, let TealAcre help you get the clarity and peace of mind you’re looking for. To contact us you can:

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