On August 20, a federal court in Texas issued a final decision in one of the lawsuits challenging the validity of the Federal Trade Commission’s (FTC) ban on noncompetes. The judge held that the ban is invalid and “set aside” the FTC’s rule. This ruling represents a major development for anyone affected by the FTC’s ban.
The FAQ below is intended to help you and your business understand the impact of last week’s ruling.
Remind me, what was the Texas case about?
After the FTC banned most noncompetes in April, several lawsuits were filed challenging the FTC’s authority to regulate noncompetes, including in Texas. In July, the Texas judge preliminarily agreed with the plaintiffs challenging the ban. She found Congress did not give the FTC authority to make rules regarding noncompetes. She also found the FTC’s ban was arbitrary and capricious since it targeted all noncompetes.
Didn’t some other judges reach a different conclusion regarding the ban?
One other judge did. A Pennsylvania judge found the FTC’s rule is valid and that the FTC does have the authority to regulate noncompetes. However, another judge in Florida found the FTC’s rule invalid. So, there were conflicting opinions, with two judges finding the rule invalid and one finding it valid.
What is the latest from Texas?
Last week’s ruling is a final judgment. The judge issued a final ruling that the FTC’s rule is invalid and unlawful. Based on that finding, the judge set aside the rule. She further held that:
1) the FTC’s rule, which was supposed to become effective on September 4, will not take effect; and
2) the rule otherwise cannot be enforced.
Does the ruling in the Texas case apply to me and my business?
Yes. The judge’s preliminary ruling from July only applied to the parties to that case. However, in last week’s ruling, she concluded that when a judge makes a final determination that a federal agency’s rule is invalid and sets it aside, that ruling has nationwide effect and is not limited to the parties to the case. So, the FTC’s rule banning noncompetes is set aside as to all employers and employees.
Is the Texas case over?
Yes, but the FTC can and likely will appeal. It is possible the Fifth Circuit or the Supreme Court could reinstate the ban, but that is unlikely given the conservative makeup of those courts.
My organization was getting ready to send the notices required by the FTC’s rule. We were also getting ready to implement new agreements without noncompetes. Do we still need to take those steps?
Because the FTC’s ban was set aside, you do not need to send the notices to current and former employees rescinding your noncompetes. You are also no longer required to comply with the prohibition in the FTC’s rule on using noncompetes. However, you should consult with counsel on the legality of using noncompetes in your employment agreements based on the laws in the jurisdictions where your organization has employees.
My organization already sent the notices. What should we do?
If you already sent the notices, you should consult with counsel on appropriate next steps.
What is next for noncompete law?
Noncompete law reverts to where it stood before the FTC proposed and issued a ban, which a court has now ruled is invalid. There is no federal ban on noncompetes, but there are a plethora of ever-evolving state law rules to be mindful of, especially when using agreements containing noncompetes and other restrictive covenants for a company with employees in multiple states.
It is possible Congress could pass legislation regarding noncompetes, although it is unlikely any successful federal legislation would be as far-reaching as the FTC’s ban.
Even though the FTC cannot substantively regulate noncompetes based on the ruling in Texas, it can still bring enforcement actions against companies that abuse noncompetes. The FTC has shown in the last 18 months it will aggressively pursue such abuse. Moreover, other agencies, including the National Labor Relations Board, are scrutinizing the use of noncompetes.
Thus, even though the FTC’s ban has been found invalid, we are still in a climate where businesses choosing to use noncompetes should only do so with appropriate employees. Companies should also ensure their noncompetes are reasonable, narrowly tailored, and do not run afoul of any applicable laws.
BFV continues to keep an eye on noncompete developments across the country, so please follow our blogs for the latest developments. In the interim, if you have questions regarding how you or your business should react to the latest ruling regarding the FTC’s noncompete ban, please feel free to reach out.
Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.
Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.
