Employers scored a victory on Tuesday as the bid by the Federal Trade Commission to ban noncompete agreements was rejected by a federal judge in Texas. The FTC federal rule was set to be enforced on Sept. 4. The FTC says roughly 30 million, or 1 in 5 workers, are subject to noncompete agreements.
The court’s ruling prohibits the FTC from enforcing the noncompete ban and provides nationwide relief for employers. Still, the decision does not prevent the agency from addressing noncompete agreements through “case-by-case” enforcement actions, said Victoria Graham, an FTC spokesperson. The FTC is also considering appealing the court’s decision, Graham said.
In Ryan LLC v. Federal Trade Commission, Judge Ada Brown (U.S. District Court for the Northern District of Texas) granted a motion for summary judgement filed by the U.S. Chamber of Commerce and other plaintiffs and rejected the FTC’s own petition for a judgement in its favor. Brown concluded that that the FTC “exceeded its statutory authority” in making the rule.
Judge Brown also concluded that the rule would cause irreparable harm.
Ryan is the same case in which Judge Brown issued a preliminary injunction, partially blocking the federal ban in July. Unlike the court’s earlier ruling which only applied to the parties in the lawsuit, the Aug. 20 judgment applies to all employers and employees across the country.
Labor and Employment Attorneys Weigh in on Judgment
“This is big news for employers and employees alike, and it eliminates (for now) much of the uncertainty which had been caused by the FTC’s nationwide ban on noncompete agreements that had been set to go into effect on Sept. 4,” said Timothy Brinks, Partner in the New Orleans office of Adams and Reese. “But this court ruling does not necessarily mark the end of the road for potential federal regulation of noncompetes. The FTC will likely appeal this ruling, and it’s possible this could spur renewed efforts at the federal level to pass legislation restricting the use of noncompete agreements.”
Brinks co-authored an article by Adams and Reese attorneys, published this morning – “Not So Fast – Federal Judge Strikes Down FTC Noncompete Ban, Status Quo for Now.”
Local law firm Baker Donelson, which has an office in New Orleans, also weighed in on Tuesday’s judgment, publishing the article, “Noncompetes Still Play, But Employers Need to Keep Their Eye on the Ball.”
“If you bet against the FTC’s rule banning noncompetes, the odds in your favor just got better,” writes Jennifer Anderson, Baker Donelson Shareholder in the Baton Rouge and Houston offices, and Theresa Sprain, Baker Donelson Shareholder in Raleigh, North Carolina.
Anderson and Sprain added: “The court’s decision should not be considered a sign to go back to business as usual. Even without the FTC noncompete rule, the FTC has other enforcement mechanisms, there are increasing state law restrictions, and some courts are hostile toward noncompetes, all of which will continue to make enforcing noncompetes a challenge. Instead, this near miss gives a fresh opportunity to evaluate all available steps to getting your house in order when it comes to protecting against competitive threats.”
Phelps, which has a New Orleans office, also published an article this morning, “FTC Noncompete Ban Struck Down Nationwide.”
“Because the court invalidated the ban under the APA (Administrative Procedure Act), the ruling applies nationally to all American companies,” writes Matthew Perez, Phelps Associate in Tampa and Raleigh. “The ruling removes one roadblock for businesses’ continued use of state-compliant noncompetes to safeguard valuable business interests. However, the enforceability of such restrictive covenants can vary based on the applicable law in each state.”
Ogletree Deakins, which has an office in New Orleans, writes that “while the rule is likely in the rear-view mirror, its impact on state courts and state legislatures will continue,” published by James Barrett and Sean Ulrich, attorneys in the Portland office. “Given the increasing attention to non-compete agreements at the state and federal level, companies should maintain efforts to update and implement their restrictive covenant programs so that each covenant is narrowly tailored to protect their actual business needs.”
Texas, Florida, and Pennsylvania Companies Sue the FTC
The FTC federal rule was originally published in April. It would prohibit employers nationwide from entering into new noncompete agreements or enforcing existing noncompetes, saying the agreements restrict workers’ freedom and suppress wages. But companies opposing the ban argue they need noncompete agreements to protect business relationships, trade secrets and investments they make to train or recruit employees.
In addition to the Texas case, companies in Florida and Pennsylvania also sued the FTC to block the rule. Ryan, LLC is a tax services firm based in Dallas and uses noncompete agreements and nondisclosure agreements to ensure employees don’t share trade secrets when they leave. In the Florida lawsuit, which was brought by a retirement community, the court granted a preliminary injunction, prohibiting enforcement of the rule just for the plaintiff. In the Pennsylvania lawsuit, the court concluded that the plaintiff, a tree company, failed to show it would be irreparably harmed by the ban and that the company wasn’t likely to win the case.
Stay tuned. This issue could travel all the way up to the United States Supreme Court.
The Associated Press contributed to this story.
