Non-Compete Law Updates

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

Law of Contracts: Legal Validity of Non Compete Clauses The United States Chamber of Commerce has filed a Complaint before the US District Court for the Eastern District of Texas challenging the Federal Trade Commission's Rule that puts a total nationwide ban on worker Noncompete Agreements.  The Rule has come into force from April 24. The Rule prohibits any contractual provision that penalizes a worker for, or functions to prevent a worker from seeking or accepting work or operating a business in the United States. As per the US Chamber of Commerce, the Rule also retroactively invalidates roughly "tens of millions" of existing agreements. As per the Complaint, the Rule will force businesses in the United States to turn to inadequate and expensive alternatives to protect their confidential information, such as nondisclosure agreements and trade-secret lawsuits. The challenge is mainly on the following legal grounds: 1. FTC has exceeded its rule making powers. 2. The proposed rule’s assessments of costs and benefits demonstrated that it was the product of political pressure, not careful economic analysis. 3. The FTC drew on the unbounded authority that the Commission granted itself. 4. The FTC’s promulgation of the Noncompete Rule was not in accordance with law And so: 1.  The Noncompete Rule should be held unlawful and set aside. 2. Court must make a declaratory judgment that the Noncompete Rule is arbitrary, capricious, or otherwise contrary to law. 3. Court must issue an order permanently enjoining the FTC from enforcing the Noncompete Rule against the members of the US CoC and other plaintiffs. Few words: The Complaint states that Noncompete agreements are commonplace, with one-fifth of all workers in the United States being parties to noncompete agreements. This is yet another lawsuit challenging the FTC's new found aggressiveness. If it passes the legal muster, it would only empower the FTC to move forth. If not, the matter will likely head to the SCOTUS, which has been very critical of regulatory excesses since the EPA case. As you might know, Non Compete Agreements in India are very narrowly interpreted (garden leave, goodwill, reasonable restraint etc.), considering the ICA clause prohibiting restraint of trade. #law #legal #lawyers #lawstudents

It was only a matter of time before a federal court blocked the FTC's noncompete rule. The odds were high it would be a federal court in the Lonestar State, and also high that it would be a nationwide injunction. That's exactly what happened yesterday. Judge Ada Brown of the U.S. District Court for the Northern District of Texas entered a nationwide injunction blocking the rule from taking effect a mere 15 days before its effective date. What does this mean? If you had plans in place to comply with the FTC's ban by its Sept. 4 effective date, you can now safely scrap those plans. We will assume that the 5th Circuit Court of Appeals and perhaps SCOTUS will have the final say on this issue, but given their current composition I would not expect a different result. That said, this issue is not going away. Four states already prohibit all employment-related non-compete agreements, and other nine (plus D.C.) limit them based on income. States will continue to expand these prohibitions, and Congress may eventually have its say on the federal level. But for now, any efforts to end all non-competes by administrative fiat are D.O.A.

Why your next HR decision could be an antitrust issue 👇   The European Commission last week published a policy brief assessing the harmful effects of #wagefixing and #nopoach agreements 🤝, and signalling their priority on its enforcement agenda. 'No-poach' agreements restrict companies from hiring each other's staff, while in 'wage-fixing' agreements employers agree to set wages at the monopsony level.   The Commission’s stance is that these agreements, typically, qualify as restrictions by #object under Article 101(1) TFEU 🚨 and are unlikely to be justified by a net efficiencies defense. The Commission regards labour market agreements as akin to a buyers’ #cartel, categorizing wage-fixing as purchase price fixing 💰 and no-poach as a form of supply-source sharing 🔗. It contends that even if legitimate objectives exist for such practices, they can be achieved by less #restrictive means such as NDAs or minimum employment commitments. The Commission concludes that these practices not only stifle competition but also #harm employees by suppressing wages and curtailing mobility, ultimately hindering innovation and economic growth 📉. This stance follows the Commission’s November raids on food delivery companies Delivery Hero and Glovo for their involvement in no-poach agreements (although no decision has yet been adopted).🕵️♂️ 🍔   Meanwhile, across the Atlantic, on April 23, the Federal Trade Commission issued a bold rule #banning (!) non-compete clauses ⛔ across all sectors (except for the highest-paid executives), with the enforcement date set for 120 days following the rule's publication. This significant step forward, recognizing the anti-competitive effects of restrictions in labor markets in the US 🇺🇸, however, did not go unchallenged. Within less than 24 hours, it was met with #legal challenges from the US Chamber of Commerce and the Business Roundtable, which may delay the rule's enforcement.   At CompLaw: Advanced EU conference in London organized by Informa Competition Law which I had a pleasure to attend, amongst many expert discussions, the national competition authorities also highlighted their enforcement #priorities. The focus on labour markets was clear. The UK’s competition authority 🇬🇧 pointed out that no-poach agreements is focus priority (2 investigations opened in the television production sector 📺 and one in the fragrance sector, and further actions anticipated). Similarly, the Portuguese authority 🇵🇹 emphasized its ongoing commitment to labor markets, showcasing its past successes in reaching #settlement decisions in this matter.   Regulatory bodies worldwide are prepared to take significant actions to ensure fair competition in labor markets👷♂️🌍 . For companies this means a pressing need to reassess their HR strategies and #employment practices 📝. 

Today, the Federal Trade Commission (FTC) fired a significant shot across the bow this week for employers relying on noncompetes. The agency ordered one of the largest pest control companies to stop enforcing noncompetes against more than 18,000 employees nationwide. The FTC also sent warning letters to 13 other pest control companies, putting the entire industry on notice that the agency views broad noncompete provisions as unfair methods of competition. This action marks the latest chapter in the FTC's ongoing campaign to dismantle noncompete practices that, in their view, suppress wages, stifle small business formation, and trap workers in jobs they would leave. The consent order imposes sweeping obligations. The company must stop entering, enforcing, or threatening to enforce noncompetes against any “Covered Employee,” defined to include current employees, former employees who left within two years, and prospective hires. The only carve-out is for directors, officers, and senior leaders eligible for equity comp. Other salient aspects of the Order: (i) the company must send a personalized letter to every affected employee declaring their noncompete null and void and informing them they are free to compete; (ii) new hires must receive notice that their employment will not be subject to a noncompete; and (iii) the company must file compliance reports for 10 years with sworn declarations. It bears emphasizing that the company settled this matter without admitting that it violated the law or that the FTC's factual allegations are true. But the practical impact on this employer, and the signal to other employers, is unmistakable. 🎯 Blanket noncompete policies are a litigation and regulatory target. The company applied the same noncompete to nearly every employee, from senior managers to entry level technicians. The FTC viewed that one-size-fits-all approach as a hallmark of unfairness. ⚖️ Enforcement activity matters as much as the agreement itself. The FTC highlighted the company's aggressive enforcement, i.e., hundreds of cease-and-desist letters, multiple lawsuits, and the power imbalance between a national corporation and individual workers who could not afford to fight back. 🔧 Consider less restrictive alternatives-like nonsolicitation and confidentiality agreements. 🗺️ Remember state law. This action adds a federal layer to an already complex patchwork of state restrictions on noncompetes. A growing number of states—including California, Minnesota, Oklahoma, Colorado, Washington, and soon Virginia, among others—have enacted outright bans or significant limitations on noncompete agreements, particularly for lower wage workers. 👁️ The FTC is watching. The warnings to 13 other pest control companies signal that the FTC views this as an industry-wide problem and intends to broaden its enforcement activity. #noncompete #FTC https://lnkd.in/evcHn--7

An update on non-competes. On July 3, 2024, a district court in Texas issued a preliminary injunction against the Federal Trade Commission's final rule banning non-competes. That order is attached below. This rule will remain enjoined (paused) for the foreseeable future as the district court, and eventually the appellate courts, wrestle with whether the FTC has the authority to issue such a rule at all. It doesn't look promising. With the recent overturning of Chevron in the Loper Bright case, which I covered extensively in this video (https://lnkd.in/g3JBveTS) we are left in the unenviable position of waiting for clarity. Chevron Deference meant that federal agencies were given substantial power in interpreting their own enabling statute. Put another way, for 40 years, federal courts had to defer to the agency interpretations of laws. Not anymore. Attached is the holding of the Loper Bright case that overturned Chevron. What this means, only time will tell. But one thing is clear: without Chevron, federal agencies will receive far more legal challenges in the future. And for 30 million Americans, they will remain locked in their non-competes.

Let's discuss yesterday's decision by a Texas federal judge to block the Federal Trade Commission's blunderbuss Rule, which imposes a comprehensive ban on most non-competes. 𝗪𝗵𝘆 𝗱𝗶𝗱 𝘁𝗵𝗲 𝗝𝘂𝗱𝗴𝗲 𝗯𝗹𝗼𝗰𝗸 𝘁𝗵𝗲 𝗥𝘂𝗹𝗲? When parties seek the type of equitable relief sought here, they must establish that they are likely to succeed on the merits, irreparable harm will result without the issuance of injunctive relief, and the balance of harms and public interest weigh in favor of granting injunctive relief. Here, the court concluded that the plaintiffs in the lawsuit, a Texas business and various employer associations, successfully established all three. On the merits, the court reasoned that the FTC has "some authority" to create "housekeeping rules" to preclude unfair methods of competition. However, Congress did not bestow it with "unlimited power" and certainly did not afford the FTC statutory authority to create substantive rules, like one that effectively bans most non-competes. The court also blocked the Rule because it is "arbitrary and capricious." An agency rule is arbitrary and capricious if it "offered an explanation for its decision that runs counter to the evidence before the agency." Here, the court concluded that the Rule, which "imposes a one-size-fits-all approach with no end date" without sufficient consideration of reasonable alternatives, was "unreasonably overbroad without a reasonable explanation. Additionally, "the Commission's lack of evidence as to why they chose to impose such a sweeping prohibition...instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious." The court blocked the Rule because, otherwise, the plaintiff would endure nonrecoverable costs of complying with a putatively invalid regulation and, thus, endure irreparable harm. "Further, the Rule makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest." 𝗔𝗻 𝗶𝗻𝗷𝘂𝗻𝗰𝘁𝗶𝗼𝗻 𝗳𝗼𝗿 𝗺𝗲, 𝗯𝘂𝘁 𝗻𝗼𝘁 𝗳𝗼𝗿 𝘁𝗵𝗲𝗲. Maybe you were hoping to read that the judge blocked the FTC's Rule for everyone. She didn't. Judge Brown passed on entering a nationwide injunction. Instead, she limited the relief to the plaintiffs themselves—not even the associated members of the plaintiff-employer organizations. 𝗪𝗵𝗮𝘁'𝘀 𝗻𝗲𝘅𝘁? This is a "preliminary" injunction. The next milestone involves the court ruling on the merits of the case by August 30, when the judge may expand the scope of the relief she afforded. In the meantime, another case like this one is pending in the Eastern District of Pennsylvania, where the judge will rule on a similar injunction request this month. The net-net is that the FTC Rule, which takes effect on September 4, 2024, still breathes. But barely. #TheEmployerHandbook #employmentlaw #humanresources

Here it is - The first decision from a court issuing at least a partial injunction against the FTC final rule banning most non-compete agreements. Earlier today, a federal judge issued a preliminary injunction against the Federal Trade Commission’s (FTC) rule that bans noncompete agreements. This ruling is in response to a challenge by tax preparation company Ryan LLC and the U.S. Chamber of Commerce. The court’s decision puts a temporary hold on the rule as applied to these Plaintiffs, which was set to take effect in September, pending a review of the FTC’s authority to enforce such a sweeping prohibition. While it is not yet a nationwide injunction, it’s clear that the rule itself is in jeopardy of being struck down entirely when the judge issues a decision on the merits of the case by late August 2024. In U.S. District Judge Ada Brown’s order, she indicates that the FTC may not have the substantive rulemaking authority to implement the noncompete ban. The judge’s opinion suggests that the FTC Act does not grant the commission the power to enforce unfair methods of competition in this manner. Given the Supreme Court’s decision on Monday striking down the Chevron doctrine — where courts often defer to the expertise of administrative agencies — this Texas decision is hardly a surprise. Judge Brown’s ruling reflects this shift, emphasizing that the FTC’s rulemaking should be explicitly authorized by Congress and that the noncompete ban is likely too broad without a solid rationale. Although you can never say never, reading the Judge’s decision, it seems extremely likely that the FTC rule is not going to survive the ultimate legal challenge, at least for now. As a result, employers should not waste significant time in modifying existing non-compete agreements to comply with the potential rule. Rather, employers should focus their energies on state law developments that may ban certain agreements because it is likely that those bans will remain in place.

𝐅𝐓𝐂 𝐁𝐚𝐧 𝐨𝐧 𝐍𝐨𝐧-𝐂𝐨𝐦𝐩𝐞𝐭𝐞𝐬: 𝐖𝐡𝐚𝐭 𝐇𝐑 𝐍𝐞𝐞𝐝𝐬 𝐭𝐨 𝐊𝐧𝐨𝐰 Ahead of the September 4th, 2024, effective date, Judge Ada Brown of the U.S. District Court for the Northern District of Texas ruled against the FTC’s ban on noncompete agreements on August 21, 2024. In the case of Ryan LLC v. FTC of the Northern District of Texas, Judge Brown ruled for Ryan (a leading global tax services and software provider) and against the Federal Trade Commission (FTC), invalidating the FTC's ban on non-compete agreements.  You can access the case here: https://lnkd.in/ejRyStcN   𝐓𝐡𝐞 𝐫𝐮𝐥𝐢𝐧𝐠 𝐰𝐚𝐬 𝐛𝐚𝐬𝐞𝐝 𝐨𝐧 𝐭𝐰𝐨 𝐤𝐞𝐲 𝐚𝐫𝐠𝐮𝐦𝐞𝐧𝐭𝐬:   1) The FTC didn’t have the authority to issue the rule because Congress only permitted it to issue "procedural rules" to address unfair methods of competition, not "substantive rules."   2) The rule itself was “arbitrary and capricious” for the following reasons: - Too broad without a reasonable explanation. - It would impose a one-size-fits-all approach with no end date. - No state in the country has enacted a non-compete ban as broad as the FTC’s rule. - Challenged why the rule didn’t target specific, harmful non-competes instead of taking a blanket approach. - The FTC overlooked the positive benefits of non-competes - The FTC didn't sufficiently consider potential alternatives rather than a nationwide ban on just about every non-compete.   While the ruling is huge setback for the FTC, the agency may appeal the decision and be heard by the 5th Circuit Court of Appeals which could change the result.    𝐖𝐡𝐚𝐭 𝐬𝐡𝐨𝐮𝐥𝐝 𝐇𝐑 𝐝𝐨 𝐧𝐨𝐰?   1) Relax! We are now back where we started, where state-specific restrictions apply, and you can continue to have non-compete restrictions as a strategy for protecting key relationships and confidential information.    2) Use this time to ensure your existing non-competes are tailored to meet the state laws in which you operate and that you are restricting their use to critical employees. Keep in mind the FTC can continue to address non-competes through more targeted case-by-case enforcement actions.    3) Consider gathering an inventory of all existing restrictive covenant agreements, including those that bind former workers. There is a tiny chance that an appeals court could bring the non-compete ban back, and as a result you should revise any employment agreements or consulting contract templates to remove references to non-compete clauses. Also, examine your equity-related non-competes so the FTC cannot conclude that they arise from the employment relationship.    If you have any questions, tips for your peers, or comments, please share below!  #HumanResources #Compliance #Noncompetes #EmploymentLaw #HR #SHRM #FTC

**Update on FTC Non-Compete Ban: Nationwide Block** On August 20, 2024, a significant legal development occurred regarding the FTC’s non-compete rule. The U.S. District Court for the Northern District of Texas, in the case *Ryan, LLC v. FTC*, ruled that the FTC's non-compete rule is unlawful. As a result, the court granted a summary judgment blocking the rule from taking effect on September 4, 2024, or at any time thereafter. Unlike previous injunctions, this ruling has a nationwide impact, preventing the FTC from enforcing the rule against any company across the country. **What’s Next?** The FTC may appeal this ruling, but it faces an uphill battle. The U.S. Court of Appeals for the Fifth Circuit, which would hear any appeal, and potentially the U.S. Supreme Court, have recently issued decisions limiting federal agencies' powers. This case challenges not only the non-compete rule but also the FTC's broader authority to make substantive rules regarding unfair methods of competition. **Action Items for Employers** Given this ruling, employers can delay any preparations to comply with the FTC’s now-blocked rule. However, they should stay vigilant and monitor the appellate process in the *Ryan* case, as future developments could further alter the legal landscape. This ruling marks a critical juncture in the ongoing debate over non-compete agreements and the FTC’s regulatory reach. This is still a good time for companies to assess what they are doing with employment agreements, such as state by state uniformity, state by state compliance, categories of employees subject to agreements, and still folding in trade secrets. #employmentlaw Matthew Dunning