Important updates on the status of the FTC’s Rule banning non-competes:
In a further update to the litigation status of the FTC’s final rule banning employee non-competes, on October 18, 2024, the Federal Trade Commission filed a petition of appeal with the U.S. Court of Appeals for the Fifth Circuit of the decision of the United States District Court for the Northern District of Texas in Ryan, LLC, et al. v. Federal Trade Commission, that the FTC did not have statutory authority from Congress to ban the use of nearly all employer non-compete provisions. With that, the case will be taken up by the Fifth Circuit to determine the validity of the FTC’s proposed ban on non-competes. We will continue to monitor the FTC’s appeal and will provide further updates as things progress.
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On August 20, 2024, in the case of Ryan, LLC, et al. v. Federal Trade Commission, the United States District Court for the Northern District of Texas, determined that the Federal Trade Commission did not have statutory authority from Congress to issue its Rule banning the use of nearly all employer non-compete provisions. With the Court’s decision, the FTC Rule did not go into effect on September 4, 2024, anywhere in the U.S. The FTC is considering whether it will appeal the Court’s ruling to the U.S. Court of Appeals for the Fifth Circuit.
As a result of the Court’s ruling, employers do not need to plan for compliance with the FTC Rule but it is important for employers to reassess their current reliance on, and future potential need to, restrict the ability of workers to engage in competitive activities both during and after termination of employment. For Virginia, Maryland, and D.C. employers, state law restrictions on the use of non-competes are still applicable.
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Recently, I had the pleasure of giving a virtual presentation along with my BKK colleague, Mark Viani, covering a number of significant recent workplace changes, including the FTC’s new Non-Compete Clause Rule, which will make it unlawful as of September 4, 2024, for employers to enter into new non-compete clauses with workers. Employee non-compete provisions that were entered into prior to September 4, 2024, will also be banned under the FTC’s new Rule as of September 4, 2024, except for those with “senior executives,” a narrow category restricted more or less to C-suite executives.
The first question posed to us, was what we thought the chances were that the FTC’s ban on non-competes would pass judicial muster as it moves through the federal courts? Our response: “No better than a 50-50 chance of survival” for the FTC’s Rule. Then, with the U.S. Supreme Court’s subsequent opinion in Loper Bright Enterprises v. Raimondo, which lowered the standard of review for judicial challenges to agency rulemaking authority, we assumed that the chance of survival of the FTC’s ban on non-competes had become even more of a longshot. However, the results so far for legal challenges to the FTC’s statutory authority to enact the ban on employer non-competes have been a real mixed bag.
Ryan, LLC v. Federal Trade Commission
On the one hand, a federal district court in Dallas, Texas, issued an injunction temporarily preventing the enforcement of the FTC’s Rule until a final decision on the merits of the lawsuit brought by Ryan, LLC, a Texas-based international tax services company. The Court limited the scope of the injunction to only the named parties in the case. In issuing a preliminary injunction, the Court concluded that Ryan, LLC was likely to succeed on the merits of the case and appeared skeptical that the FTC had statutory authority from Congress to issue the ban on non-competes. Ryan, LLC, has been joined in the lawsuit by a number of business advocacy groups, including the U.S. Chamber of Commerce. Together, they are expected to further press the Court to rule that the FTC’s ban on non-competes is unlawful and that a nationwide injunction against its enforcement is the appropriate remedy. A decision on the merits of the case is not expected until August 30, 2024.
ATS Tree Services, Inc. v. Federal Trade Commission
About 1,300 miles northeast of Dallas, in Philadelphia, Pennsylvania, another federal district judge reached an entirely different conclusion on essentially the same issues that were raised in the Texas lawsuit. Here, the Court refused to issue a preliminary injunction against enforcement of the ban on non-competes, finding that ATS Tree Services, the Pennsylvania-based company that had sued the FTC, was unlikely to suffer irreparable harm in the absence of the issuance of a preliminary injunction. The Court further suggested that ATS Tree Services was not likely to succeed on the merits of the case because Congress had provided the FTC with rulemaking authority that is likely broad enough to encompass the Rule banning non-competes.
Properties of the Villages, Inc. v. Federal Trade Commission
Other legal challenges to the FTC’s ban on non-competes are presently pending, including one in the U.S. District Court for the Middle District of Florida brought by Properties of the Villages, Inc., a Florida real estate sales company. The company’s motion for a preliminary injunction against enforcement of the FTC’s ban on non-competes is pending for a decision by the Court.
Practical Considerations for Employers
With a September 4, 2024, effective date looming, and mixed signals from the courts over whether they will enjoin enforcement of the FTC’s ban on non-competes, what practical planning should employers be engaging in right now? Though many still feel that there is a better than remote chance that the FTC’s ban on non-competes ultimately will be stayed prior to its effective date, a decision to that effect, if it comes at all, may not be forthcoming until the end of August 2024, when it would be difficult for employers who have waited to act to become fully compliant, if the ban is found to be enforceable.
Therefore, employers should be undertaking steps toward compliance with the FTC Rule, including the requirement that employers provide written notice to all employees, except senior executives, who are currently covered by a noncompete, informing them that the restrictions are no longer in effect and cannot be enforced. Employers must complete the written notice requirement to employees by no later than September 4, 2024. The FTC provided model notice language for employers in the Rule. In addition, it is important for employers to reassess their current reliance on, and future potential need to, restrict the ability of workers to engage in competitive activities both during and after termination of employment. For many employers, this will entail strengthening existing employee non-solicitation provisions and fine-tuning restrictions on confidentiality of business information, or implementing new ones where none are currently in place. Carefully drafted, employee non-solicitation and confidentiality restrictions will still likely be enforceable under the FTC’s ban on non-competes.
We will be providing more updates regarding the status of enforceability of the FTC’s rule on non-competes. If you have questions about your current policies and practices to ensure compliance with it or with existing Virginia, Maryland, or District of Columbia employment laws, please contact Doug Taylor, at rdougtaylor@beankinney.com or (703) 525-4000.
This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the author and are not necessarily the views of any client.