Editor's Note
Noncompete Agreements and Injunctions
I don't think the challenges to the FTC ban on noncompete agreements are really about the importance and value of noncompete agreements. They're about political and legal attacks on agency powers, which we're seeing more of. When Congress doesn't work, agencies are stuck somewhere on the spectrum between doing what they can with the power and resources they have or having their budgets cut, so they can't do anything at all. Right now, the current administration has agencies doing what they can and the people opposed to that are making legal challenges.
Injunctions are about dealing with immediate harm that can't wait until all the evidence is in. In cases challenging an agency rule and requesting a nationwide injunction, it's also about public policy and what is likely to happen to the people affected if the injunction does or does not go into effect. Courts are also supposed to look carefully at whether there are other ways to address the actual harm and to narrowly tailor any injunction to that actual harm.
Here, there is an FTC rule banning noncompete agreements for most employees. The agency made the rule because noncompetes interfere with employees being able to change jobs and work. The rule also requires employers to tell employees their noncompete agreements are no longer valid.
The people challenging the rule are not taking the position that they need noncompete agreements and if they don't have them, they and their businesses will be significantly harmed. They are not providing evidence or examples of existing or imminent situations where they will actually be harmed.
The challenge is based solely on whether the agency had the authority to make the rule in the first place. And the urgency is because the requirement to give notice goes into effect in early September, which in court time, is actual urgency.
It's likely there will eventually be a broader injunction because the courts where the actions are filed generally agree that agencies should have fewer powers and tend to decide that way.
Meanwhile, the legal machinations are actually causing employers more uncertainty and harm than the rule itself.
The number of situations where noncompete agreements actually matter to protect employer secrets is small. There aren't that many trade secrets or proprietary information that noncompetes are the sole protection for. Those are usually protected by other things like intellectual property rights and nondisclosure agreements that protect proprietary business information. Those rights and agreements are in effect and will continue to be no matter what.
My take is that the courts are simply looking at the question of whether the agency has power here and what the likely outcome is. They aren't looking at the harm involved or how to protect against it.
My advice is if you use noncompetes, decide whether they really matter to your business.
- Have you ever tried to enforce a noncompete?
- How did it go?
- How much time and money you spent dealing with it?
- How often have people asked to be released from a noncompete and how did you handle it?
- Do you and employees mostly ignore them?
In short, look at what you are really trying to protect and whether there are other effective ways to protect those things. There's a good chance that other approaches exist and may even work better.
Then do what's right for your business and employees. It may be to voluntarily get rid of them—no matter what happens with the FTC rule. And if not, then work to make the noncompetes effective for the reasons you have them.
- Heather Bussing
As most employers are aware, and as we previously discussed in an April blog post, the Federal Trade Commission (“FTC”) enacted a sweeping administrative rule banning the vast majority of non-competition agreements in the country (the “Rule”).
The Rule met swift legal challenges, with the leading voice being the tax firm Ryan, LLC (“Ryan”). Ryan filed a lawsuit to void the Rule pursuant to the Administrative Procedure Act (“APA”) and prevent the FTC from enforcing it. Ryan was shortly joined by various industry groups, including the U.S. Chamber of Commerce, which consolidated their legal challenges to a single lawsuit in the United States District Court for the Northern District of Texas.
As part of the lawsuit, Ryan and the industry groups sought a preliminary injunction (“PI”) to stay the effective date of the Rule, pending the Court’s final determination of the case.
On July 3, 2024, Judge Ada Brown ruled on the plaintiffs’ motion and issued a PI staying the effective date of the Rule as to Ryan and the other plaintiffs. In its ruling, the Court found both that (a) Congress did not delegate to the FTC authority to issue the Rule, and (b) even if it did, the Rule was arbitrary and capricious insofar as the FTC did not adequately address the explicit need for the Rule or consider alternatives. Accordingly, the Court concluded that the plaintiffs were likely to succeed on the merits in their ultimate effort to void the Rule under the APA.
However, Judge Brown expressly limited her order only to the parties in the case, including holding that the PI does not apply to businesses or individuals that may be represented by the Chamber of Commerce and other industry groups involved in the lawsuit. Although the plaintiffs requested that the injunction apply nationwide to all employers, the Court refused to go so far at this time, while leaving the door open to potentially revisiting the issue in a final ruling tentatively scheduled to be released on August 30, 2024.
While the Court’s ruling is surely a “win” for employers that utilize non-compete agreements to protect their business interests, it is a rather limited one as a practical matter.
What Does This Mean?
Because the Court’s PI Order is limited only to Ryan and the other plaintiffs in their capacities as employers (rather than in their capacity as representing their constituents), for 99.9% of employers in the United States the Court’s ruling does not explicitly do anything. As of now at least, for those many other employers, the Rule is still going to go into effect on September 4, 2024.
What About Other Legal Challenges?
While Ryan’s lawsuit was the first one filed to challenge the Rule under the APA, it was not the only one. A similar lawsuit also seeking to invalidate the Rule under the APA was filed by the company ATS Tree Services in the U.S. District Court for the Eastern District of Pennsylvania. The Pennsylvania Court is currently scheduled to release its own PI Order on July 23, 2024. It is possible that despite how the Court ruled in the Ryan case, the Court in the ATS case may issue the type of nationwide injunction for which many employers have been hoping.
What Should Employers Do?
As of today, despite the Court’s ruling in the Ryan case, the Rule is still scheduled to go into effect for the vast majority of employers on September 4, 2024.
Accordingly, the prudent and conservative approach for businesses is to continue to take stock of their obligations under the Rule, including determining which employees must receive notices required by the Rule on or before the effective date.
However, these legal challenges will continue brewing over the next two months before then. Given the forceful but limited ruling in the Ryan case, we also may see similar copycat suits being filed across the country attempting to invoke the same relief that currently only a small handful of organizations have been afforded. Therefore, it would behoove employers to hold off on sending any of these notices until at least September 1, with hopes that a court (or even the FTC) will provide clarity to employers on a nationwide basis.
Employers who are eager to get ahead and begin preparing the notices should consult with counsel to ensure that the notices contain both (1) the language necessitated by the Rule and (2) appropriate carveouts to ensure that the company may still enforce any non-competes should the Rule be definitively voided later in litigation.
