Non-Compete Law Updates

⚖ 🗣 On August 20, the U.S. District Court for the Northern District of Texas issued a significant ruling in Ryan, LLC v. Federal Trade Commission, 𝐛𝐥𝐨𝐜𝐤𝐢𝐧𝐠 𝐭𝐡𝐞 𝐞𝐧𝐟𝐨𝐫𝐜𝐞𝐦𝐞𝐧𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐅𝐓𝐂 𝐑𝐮𝐥𝐞 𝐭𝐡𝐚𝐭 𝐰𝐨𝐮𝐥𝐝 𝐡𝐚𝐯𝐞 𝐛𝐚𝐧𝐧𝐞𝐝 𝐧𝐨𝐧𝐜𝐨𝐦𝐩𝐞𝐭𝐞 𝐚𝐠𝐫𝐞𝐞𝐦𝐞𝐧𝐭𝐬 𝐧𝐚𝐭𝐢𝐨𝐧𝐰𝐢𝐝𝐞. Initially scheduled to take effect on September 4, 2024, the rule was found to exceed the #FTC's authority and be overly broad and based on inconsistent evidence. 𝐀𝐬 𝐚 𝐫𝐞𝐬𝐮𝐥𝐭, 𝐞𝐱𝐢𝐬𝐭𝐢𝐧𝐠 𝐧𝐨𝐧-𝐜𝐨𝐦𝐩𝐞𝐭𝐞 𝐚𝐠𝐫𝐞𝐞𝐦𝐞𝐧𝐭𝐬 𝐫𝐞𝐦𝐚𝐢𝐧 𝐞𝐧𝐟𝐨𝐫𝐜𝐞𝐚𝐛𝐥𝐞, 𝐚𝐧𝐝 𝐧𝐞𝐰 𝐨𝐧𝐞𝐬 𝐜𝐚𝐧 𝐬𝐭𝐢𝐥𝐥 𝐛𝐞 𝐟𝐨𝐫𝐦𝐞𝐝. However, this isn't the final word. The FTC is expected to appeal, and the case may eventually reach the Supreme Court of the U.S. Employers should stay vigilant and continue reviewing their non-compete agreements to prepare for any potential future changes. It's also worth noting that while this ruling applies at the federal level, individual states may still impose their own restrictions on non-compete agreements. For more details, you can read the court’s decision https://lnkd.in/g6MT26RW #noncompetes #ftcrules #executivesearch

Days before a controversial noncompete law was to go into effect, a federal judge in Texas barred the U.S. Federal Trade Commission (FTC) rule, saying the agency exceeded its statutory authority in implementing the rule, and finding the rule to be “arbitrary and capricious.” In her latest ruling, U.S. District Judge Ada Brown of the Northern District of Texas set aside the FTC’s ban on non-competes and held that it should not be enforced or otherwise take effect nationwide. This ruling is at odds with a previous ruling in Pennsylvania. Expect litigation to continue. https://lnkd.in/eRKeQkF7

Noncompetes are now unenforceable! Well, that’s not quite true, despite the headlines. This is what is true, and is something I’m following as a lawyer who drafts/negotiates #noncompete provisions along with litigating them (I have 2 upcoming trials primarily focused on the enforceability of such clauses): On April 23, the Federal Trade Commission (#FTC) issued a final rule to ban many, but not all, #noncompetes across the United States. The rule isn’t effective until 120 days after publication in the Federal Register. So, don’t go to your boss’ office today, stick up your middle finger, and tell him or her to shove the noncompete where the sun doesn’t shine. Furthermore, there is an exception. Existing noncompetes for senior executives can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Additionally, there is a possibility that the rule never becomes effective. The expectation is that litigation will soon commence over whether the ban is proper, with a request that the FTC’s rule be stayed in the meantime. Importantly, whether or not the rule withstands challenge, there are mechanisms employers can use to protect their proprietary information, which they should be examining irrespective of the outcome. As the FTC has noted, secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Some say NDAs aren’t worth the paper they’re printed on; I’m currently in the middle of a multi-million dollar case involving the breach of one, so we shall see! If you have any questions about the above, then feel free to contact me! https://lnkd.in/eihUvXP8

I promise this isn't just another post recapping the FTC's rule banning non-competes. Instead, I'm going to do a deeper dive into what I've been hearing the last few days beyond the headlines. Indeed, I've seen few posts looking beyond it says to think about the strategy that C-level suite executives should be thinking about. So now that we've had a few days to consider the proposed rule, here's some additional items to think about: 1) The US Chamber of Commerce has now filed its anticipated lawsuit challenging the rule and it has done so in Texas, which has judges that have imposed nationwide injunctions on certain Biden administration rules. Thus, it is far from a sure thing that this rule will go live in four months; in fact, I'd argue that it is far more likely we'll see a delay. That’s not to say that employers should ignore the rule. Far from it. But it also means that employers should be mindful that this isn’t quite written in stone yet. Analyze it but don't panic about it. 2) Let's suppose though that the rule goes into place. Employers will want to think about what protections it needs with what employees and at what levels. That means that you might have different versions of restrictive covenant agreements for different levels of employees. Will non-service agreements (where employees agree not only to not solicit customers, but not to service customers) be enforceable under this? What about provisions that provide a financial incentive to an employee to stay (but don't explicitly ban an employee from working from a competitor)? How will partnership agreements be enforced, particularly where an employee may be part worker and part partner? 3) The provisions regarding an asset sale of a business are going to cause heartburn for transactions. As the rule is currently phrased, non-competes may still be valid pursuant to a sale of a business or all (or substantially all) of a business's assets. The asset sale provisions contemplate "all or substantially all" of the assets to allow a non-compete to be enforceable. So what happens when a business sells off a portion of itself? And what types of people will be covered by this? Owners? Senior executives? Or any "person" since that language is used in this clause versus "worker" elsewhere? 4) While a lot has been made about how employers can protect their employees from leaving, employers should also consider the flip-side --- how can you use this to attract employees who might otherwise have been off limits to you? Are there competitors that have vulnerabilities that you might look to hire from? As the FTC projects, this rule may force companies to make their workplaces attractive to work for by increasing compensation, enhancing benefits, and emphasizing work culture. Regardless of whether the rule goes into place, executives should be considering how this rule might impact recruiting and retention efforts. There's a lot to consider. Go beyond the headlines.

BREAKING: The #FTC’s rule banning #noncompetes is blocked nationwide. Bottom line: based on today’s Texas ruling, noncompetes that are enforceable (absent the FTC’s rule) can remain in effect, can continue to be entered into, and can be enforced. Employers no longer need to send out notices by September 4. In more detail: Today, Judge Ada Brown of the Northern District of Texas issued a ruling setting aside the FTC’s noncompete ban nationwide. “Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must "hold unlawful" and "set aside" the FTC's Rule…” (link to opinion: https://lnkd.in/gYTQ_R3s) In early July, the Texas district court had previously granted a preliminary injunction blocking enforcement of the rule as to the named plaintiff & plaintiff-intervenors only. Today’s ruling expands that, blocking the FTC’s noncompete rule nationwide for all, not just for the plaintiffs in the suit. Similar to SCOTUS’s reasoning in striking down the DOL’s vax-or-test rule just a few years ago, the Texas court finds the FTC’s rule unreasonably overbroad without a reasonable explanation, criticizing the rule as a “one-size-fits-all approach with no end date.” The Texas court also agrees with the plaintiff & concludes that the FTC lacks statutory authority to promulgate a substantive rule under this section of the FTC Act. Relying on recent Fifth Circuit precedent, Texas Judge Ada Brown concludes that the proper remedy is to block the FTC’s noncompete ban from taking effect nationwide — not just for the litigants in this case, but for all. So what’s next? The NYT reports that the FTC will consider an appeal (TBD). But even so, I personally remain skeptical that the rule would withstand scrutiny if it is appealed up to the current Supreme Court. Two years ago, SCOTUS voted 6-3 to stop OSHA from enforcing its vax-or-test Emergency Temporary Standard (ETS) that would have required large employers to require masking & weekly COVID-19 testing of unvaccinated employees, on the general premise that the ETS was overbroad. I can see the same thing happening here — that is, if the FTC appeals. Stay tuned.

Right as Eric Meyer and I were discussing whether and when a federal judge would rule on the challenge to the #FTC ban on #noncompetes yesterday, as promised, she did just that. Federal Judge Ada Brown granted the plaintiffs’ preliminary injunction against the FTC ban—but only as to corporate parties as employers themselves. Judge Brown noted that while this order is preliminary, the court would rule on the ultimate merits of the action on or before Aug. 30, 2024. In a nutshell, the court agreed that the FTC’s statutory authority for promulgating the Rule did NOT authorize substantive rulemaking, which is what the FTC ban purported to do. Judge Brown reasoned that a plain reading of the FTC Act did not grant the FTC the authority to issue substantive rules regarding unfair methods of competition. And, a different section limited the FTC’s ability to make rules dealing with unfair or deceptive practices—not unfair methods of competition.  Thus, the court concluded that while the FTC had some authority to promulgate rules to preclude unfair methods of competition, but not enough—it lacked the authority to create substantive rules through this method. So, plaintiff was likely to prevail on the merits. Preliminary injunction granted. Moreover, because the FTC is an administrative agency, the Administrative Procedure Act’s “arbitrary and capricious” standard limits the FTC ban. The court deemed the ban to be “unreasonably overbroad without a reasonable explanation. It imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’” Because the FTC could not demonstrate why they needed such a broad prohibition on noncompetes, rather than targeting specific ones, the Rule was arbitrary and capricious. And...the court found that the plaintiffs prevailed on the remaining requirements to obtain preliminary injunctive relief as well. What does this mean? Right now, not a ton to most of the country. Judge Brown limited the scope of the injunction. ❖ First, she refused to consider the facts before her as an “appropriate circumstance” that would merit nationwide relief. This is especially so when the parties agreed that 46 states have varied case law and statutory schemes to address non-competes! ❖ Second, Judge Brown determined that recent precedent supported limiting injunctive relief to only the “plaintiffs” before the Court and not “universal” or “nationwide” injunctive relief. She reasoned that Plaintiffs offered no briefs detailing how or why nationwide injunctive relief would be necessary for these plaintiffs at this preliminary stage. ❖ And, to the extent that the Chamber of Commerce appeared to argue it had “associational standing” on behalf of its members, it failed to brief that argument. Watch for Judge Brown’s final merits ruling by August 30, 2024, which is likely to block the FTC ban in the Northern District of Texas. #emplaw

The Federal Trade Commission is all-in on its proposed noncompete ban, appealing the nationwide injunction against it.🎲🃏🪙 On Friday afternoon, the Federal Trade Commission notified a federal judge in Texas who had previously entered a nationwide injunction against its sweeping noncompete ban that the agency would appeal her decision to the Fifth Circuit Court of Appeals. The judge had previously ruled that Congress did not afford the FTC statutory authority to create substantive rules, like one that effectively bans most noncompetes. The court also concluded that the FTC's rule banning most noncompetes was “arbitrary and capricious” because the FTC sought to adopt a one-size-fits-all approach without sufficiently considering reasonable alternatives. The net result was an overly broad rule that, without explanation, made unenforceable long-standing contractual agreements that courts had often recognized as lawful and beneficial to the public interest. The FTC also lacked evidence to show why they imposed such a sweeping prohibition instead of targeting specific, harmful noncompetes. In September, the FTC had previously told a Pennsylvania federal judge that an appeal of the Texas decision “would likely take months to fully brief and could take a year or longer until a final decision.” So, don't expect the nationwide injunction to be lifted anytime soon, if at all. Additionally, a change in presidential administration could impact this appeal, and another one is pending in the Eleventh Circuit Court of Appeals after a federal judge in Florida enjoined the noncompete ruling for a single plaintiff. FTC Chair @Lina Khan's current term ended last month. She remains FTC chair unless and until a new president nominates a replacement. Last night, I read a WIRED article suggesting neither presidential candidate may be keen on keeping Ms. Khan as FTC chair. And if she goes, so might any remaining momentum for the noncompete ban. For now, noncompetes remain regulated on a state-by-state basis. Check your local listings and call your employment lawyer if you have questions about them. #TheEmployerHandbook #employmentlaw #humanresources

More information based on some legal advice about the FTC non compete ruling, particularly for Engineers, Researchers, Analysts and Traders at Hedge Funds and Trading firms: ❔ Is the $151k compensation benchmark for senior execs total comp or basic salary? (as most of these types of employees are heavily incentivized by performance based bonuses) The benchmark is based on total compensation, which can include salary, commissions, non-discretionary bonuses and other non-discretionary compensation. ❓ If an engineer or researcher is earning more than that but not in a "policy making" position does that mean their non compete is obsolete? Under the FTC’s rule, workers must both earn more than the required threshold ($151,164) and be in a policy-making position. The FTC has intentionally drawn this definition narrowly to capture “highly paid workers with the highest levels of authority in an organization.”  The exception targets those with executive-level authority, so a non-compete with a software engineer would typically be unenforceable under the FTC’s rule, even if they earn far above the compensation threshold. Also, keep in mind that these are with respect to non-competes already in place. 🔐 If someone is exposed to a trading strategy that is defined as a “Trade Secret” or they have signed an NDA could they be prevented from working at a competitor for fear of sharing said secrets or information? Under federal and state trade secret laws, employers could still bring claims to prevent a former employee from using or disclosing the employer’s trade secrets. Some states allow claims based on an “inevitable disclosure” theory, which applies when an employee is performing the same exact job for a competitor in the industry and it is inevitable that he/she will rely on a former employer’s trade secrets in the new job (even if unintentionally). That said, it is difficult to prevail on an inevitable disclosure claim, but if successful, the employee can be prevented from working for the competitor. ⏲ Do you think this will get passed and when will it be published in the federal register? We do not know for certain, but it will likely be within the next few days or weeks. The rule has already been challenged in court, and there is a good chance implementation will be delayed, at minimum. The soonest it could go into effect would be August, if at all. **DISCLAIMER** This is directly from some legal advice we obtained but I am not a lawyer myself!! (So please do not take this as legal advice from me!)

Non-competes: A tale of two lawsuits. Yesterday, in case no. 24-CV-01743, a US District Court for the Eastern District of Pennsylvania denied a motion for preliminary injunction thereby paving the way for the FTC's ban on noncompetes. In a nutshell, the court believes that the FTC's rule banning noncompetes is enforceable. So noncompetes are done, right? Not so fast. Remember that on July 3rd, 2024, in case no 24-CV-00986, a US District Court for the Northern District of Texas reached the exact opposite conclusion. Instead, that court issued the injunction that prevents the rule from going into effect. In a nutshell, the court believes that the FTC's rule banning noncompetes is unenforceable. Sidebar, does it surprise you the learn that the judge in the Texas case was appointed by Trump & the judge in the Pennsylvania case was appointed by Biden? So what happens when federal district courts disagree? We're about to find out. Now it's important to note that the appellate courts, in this case the 3rd Circuit & the 5th Circuit have not examined the FTC's final rule or these two cases. Nor have they examined how the removal of Chevron Deference will impact their thinking. What is clear, is that we are just getting started. I have no doubt that more litigation against the FTC's rule will happen across the country. These lawsuits will find their way to the appellate courts. Those courts will issue opinions that will bind only the states within their jurisdiction. We could actually see noncompetes legal in some states at the federal level & illegal in others. This would be a truly wild outcome. Unless SCOTUS opines, we can expect a very fragmented labor market as it relates to noncompetes. If SCOTUS eventually does take the case, it will be among the most important labor decisions in our lifetimes. Until then, 30 million working Americans will be in limbo.