For the past approximately 18 months, FOS has been closely monitoring and communicating with our clients regarding the legislative and administrative attempts to limit the enforceability of noncompete agreements in employment. These attempts culminated at the federal level in the Federal Trade Commission’s April 23, 2024 approval of its final rule (the “Rule”) banning most noncompete agreements in employment contracts.
As FOS continues to caution our clients, employers should be prepared to comply with the Rule when it becomes effective, in a matter of weeks, on September 4, 2024. We have also been closely monitoring legal challenges to the Rule, including two lawsuits claiming it is invalid – one in Pennsylvania and one in Texas.
In each of these lawsuits, plaintiffs asked the respective court to stay the Rule by issuing a preliminary injunction until it determines the Rule’s validity.
The Texas and Pennsylvania courts so far have come to different conclusions as to whether preliminary injunctions should be issued, setting the stage for additional uncertainty for employers.
On July 3, 2024, the court in the Northern District of Texas case Ryan LLC v. F.T.C, issued a preliminary injunction staying the Rule and its enforcement pending the lawsuit’s resolution. That injunction, however, only affects the parties in that lawsuit, and does not have formal nationwide effect. Among other things, the court viewed plaintiffs as having a likelihood of success on the substance of their claims that the Rule is not the type authorized by Congress and exceeds the FTC’s authority.
The Texas court indicated it intends to issue a final decision on the Rule’s validity by August 30, 2024.
Just 20 days later, on July 23, 2024, the Pennsylvania court in ATS Tree Services, LLC v. F.T.C. came to a different conclusion and refused plaintiff’s request to issue a preliminary injunction. That court primarily based its decision on its conclusion that plaintiffs would not suffer irreparable harm if no injunction was issued. The court also concluded, contrary to the Texas court, that the Rule was well within the FTC’s jurisdiction and authority.
Further complicating the issue is the fact that both cases were begun before the U.S. Supreme Court’s very recent Chevron decision, which narrowed the allowable scope of federal agency action, including the enactment of rules, in favor of legislative action by Congress. That decision provides additional ammunition for the Rule’s challengers, who may rely on Chevron in arguing that the FTC exceeded its regulatory authority in issuing the Rule.
Whatever their final resolutions, we now have a circuit split, and both the Texas and Pennsylvania decisions will likely be appealed, continuing employers’ uncertainty for months, if not years.
So what should employers do now?
If you haven’t already done so, obtain and review all of your company’s noncompete agreements and pull those which are still in effect. Make a list of current and former employees subject to the “live” agreements, with all available contact information. Prepare a plan of action to contact them after the Rule’s effective date if need be. Watch for additional information as the countdown to September 4 continues.
FOS prior Client Alerts and FOS On The News articles provide a full description and analysis of the Rule, its potential impact on existing and contemplated noncompete agreements, and the enactment of similar legislation by several states. The most recent alert and article are at https://foslaw.com/federal-trade-commission-approves-ban-on-many-non-compete-agreements/. All FOS publications on this and other legal subjects can be found at https://foslaw.com/news-views/.
Keep in mind that the Rule does more than just ban most noncompete agreements after September 4. The Rule also places affirmative obligations on employers to notify current and former employees with existing noncompete agreements that the provisions are no longer enforceable. This, of course, places employers in a very difficult position.
FOS will continue to monitor these cases and other developments regarding the validity of employment noncompete agreements. In the meantime, our attorneys are available to discuss these continuing legal developments, your company’s noncompete agreements, and other employment law issues.
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