FTC’s Non-Compete Ban Faces Legal Roadblock

July 10, 2024

By Matthew Wilmot, Edgar Bueno, T. Mills Fleming, Tom Cullen, Brad Harmon, & Shawn Kachmar

On July 3, a federal judge in Texas granted a preliminary injunction halting the Federal Trade Commission’s (FTC) Non-Compete Rule (the “Rule”).  This ruling effectively stops implementation of a ban on most non-compete provisions in employment contracts.  While the court limited its decision to apply only to the plaintiff/intervenors in the case – a tax service firm named Ryan, LLC, and the U.S. Chamber of Commerce – the ruling’s impact potentially goes far beyond the named parties. The court has promised to issue a final ruling no later than August 30, just days from the Rule’s proposed effective date.

Understanding the Non-Compete Rule

The Non-Compete Rule, set to take effect on September 4, 2024, was intentionally broad and sweeping.  Essentially, the Rule: (1) banned almost all non-compete agreements between employers and employees, including independent contractors, and (2) mandated that employers inform employees these agreements were no longer enforceable. 

There were notable exceptions, including non-competes between senior executives and employers, as well as those entered into as part of a sale of a business.  As a result of the judge’s ruling, much of the academic debate on whether a non-compete falls within one of these exceptions has now been rendered mooted, at least for now.

If the FTC is authorized to eliminate non-competes, the health care industry could see significant changes, as non-competition clauses are commonly included in employment agreements. For example, in many regions, non-compete provisions are present in almost every provider’s employment agreement.  Most physicians have applauded the FTC’s rule, arguing that non-competes drive physicians away and negatively impact health care access.

However, the Rule seems to have fallen victim to the growing movement of the judiciary to rein in the authority of administrative agencies like the FTC.  Courts are increasingly reluctant to defer to agency positions, and we expect to see this activist approach to many more legal challenges within the health care industry, which has historically relied upon so-called “agency expertise” and “sub-regulatory governance” to its detriment.

Other legal challenges to the FTC’s Rule have been filed in various courts.  These decisions, whenever they are issued, may further limit the Rule and/or the FTC’s authority. The FTC will likely appeal the court’s decision.

The Court’s Ruling

The court’s ruling is significant, as it determined that the FTC overstepped its authority in issuing the Non-Compete Rule and deeming it arbitrary and capricious.  Specifically, the court stated that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition . . .”  Consequently, after analysis, the court found that the plaintiffs were likely to succeed on the merits to their case.  

The court further found that the plaintiffs would suffer irreparable harm and incur significant non-recoverable costs if they were forced to comply with the Rule.  In their briefings, the plaintiffs argued that if the Rule were to become effective, that departing workers would take intellectual property and proprietary methods to its competitors . . . forcing employers to expend significant time and costs to counteract the effects.  

Looking Ahead

The court’s ruling is indeed a victory for employers as it reflects a halt to the FTC’s Non-Compete Rule, albeit a limited and possibly temporary one.  The stage has been set for further litigation as the court intends to rule on the ultimate merits of the case on or before August 30, 2024.

Employers have consistently relied upon non-competes to protect their business interests and relationships, particularly in the health care space.  For example, they devote substantial time, effort, and resources in recruiting and relocating practitioners to help build communities and individual practices.  A key contractual provision for ensuring a return on that investment has been the use of non-compete provisions.

Despite the court’s stay of the FTC’s Rule, it is likely that current and potential employees are aware of and will continue to use the Rule as leverage in contract negotiations.  One likely effect of this litigation is that non-competes will be more of a sticking point than usual in contract negotiations.  Employers should be aware of this possibility and be prepared to address such concerns. 

Further, employers should still consider reviewing their employment agreements to identify other provisions that may need refinement to protect business interests.  For example, consider whether there is an opportunity to include more robust non-solicitation or non-disclosure provisions, or to modify the terms of termination or repayment of benefits.  As these provisions will continue to be the subject of further litigation and rulings, employers that have traditionally relied on non-competes as a cornerstone of their employment relationships should consider evaluating these relationships holistically and modify them accordingly.

If you have any questions about the court’s ruling or the FTC’s Non-Compete Rule, please contact one of the authors of this article. We will continue to monitor developments on this important topic and issue updates as appropriate.

A copy of the court’s decision can be found here.

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