On August 20, 2024, a Texas federal decide issued a nationwide injunction barring the implementation of a controversial Federal Commerce Fee (FTC) regulation that will have invalidated tens of thousands and thousands of current non-compete agreements and precluded the adoption of latest covenants. The choice comes as an incredible reduction to employers that feared the FTC’s regulation would have made it practically not possible to stop unfair competitors and shield employers’ funding in its staff and towards the misappropriation of confidential and proprietary info.
As we first reported in April, the FTC issued a regulation (the “Non-Compete Rule” or “Closing Rule”) that, on its September 4, 2024 efficient date, would have barred the enforcement of current non-compete covenants in all however a handful of circumstances involving extremely compensated senior executives, discovering that such agreements are inherently anti-competitive because of their affect on worker mobility. The Closing Rule additionally prohibited employers from getting into into practically all new non-compete agreements after the Efficient Date, whatever the job duties carried out, and incomes earned, by staff.
Because the publication of the Closing Rule, it has been topic to varied authorized challenges, with combined outcomes. (See right here and right here.) For instance, in July 2024, a Texas federal courtroom issued a preliminary injunction suspending the implementation of the Closing Rule, however solely as to the events earlier than the Court docket, leaving open the opportunity of the Rule going into impact on its September 4, 2024 efficient date as to all different individuals within the judicial district and out of doors the judicial district. A number of weeks later, a Pennsylvania federal courtroom issued a instantly opposite choice, discovering that the Closing Rule was inside the FTC’s authority and that it was in line with the FTC’s Congressional mandate to stop unfair competitors practices. Late final week, a Florida federal courtroom adopted the instance of its Texas counterpart, issuing a preliminary injunction however solely as to the events earlier than the courtroom.
This combined bag of jurisprudential selections left employers on the horn of a dilemma: with the September 4, 2024 efficient date quickly approaching, ought to they notify their staff of the purported invalidity of their restrictive covenants though a last judgment had not been entered or threat company motion for failing to well timed notify staff of the Closing Rule? Fortunately, employers can breathe a sigh of reduction because the Texas federal courtroom that first took on this concern dominated on August 20, 2024 that the Closing Rule is enjoined nationwide as to all events, including unequivocally: “The Court docket units apart the Non-Compete Rule.” Particularly, the courtroom concluded that the FTC exceeded its statutory authority when it adopted the Closing Rule, and that the Closing Rule itself was arbitrary and capricious.
Though the FTC has some authority to promulgate guidelines to preclude unfair strategies of competitors, the courtroom discovered that the FTC lacks the authority to create substantive guidelines, versus “housekeeping” guidelines, and located additional that the FTC Act doesn’t embody a statutory penalty for violating guidelines promulgated by the FTC, underscoring the company’s lack of substantive rulemaking energy. Certainly, the courtroom reminded, for 48 years, the FTC “explicitly disclaimed substantive rulemaking authority,” and even when the company urged it had such authority, it didn’t promulgate a single substantive rule beneath the precise subsection of the FTC Act on which it relied for the authority to concern the Closing Rule. Primarily based on all of this, the courtroom “concludes the textual content and construction of the FTC Act reveal the FTC lacks substantive rulemaking with respect to unfair strategies of competitors” and that “the [FTC] has exceeded its statutory authority in promulgating the Non-Compete Rule.”
Though the shortage of statutory authority to concern the Closing Rule was enough to finish additional dialogue, the courtroom added that the FTC’s company motion additionally was arbitrary and capricious, an ordinary that considers whether or not an company has failed to think about an necessary facet of an issue in endeavor company motion or provides an implausible justification for its motion. The courtroom discovered that the FTC’s Closing Rule was arbitrary and capricious beneath this evaluation “as a result of it’s unreasonably overbroad and not using a affordable clarification,” imposing “a one-size-fits-all method with no finish date” to attempt to resolve the problem of diminished worker mobility ensuing from covenants to not compete. The courtroom was unpersuaded that the research on which the FTC relied in drafting its sweeping Closing Rule clearly demonstrated adversarial financial results from state insurance policies towards non-competes warranting such overbreadth. The Closing Rule was broader than any state’s prohibition on non-competes—even California—suggesting that the “categorical ban” was disproportionate to the problem the FTC sought to handle and failed “to think about the optimistic advantages of non-compete agreements” on entrepreneurship and safety of proprietary info. The Closing Rule additionally “did not sufficiently tackle options” to a sweeping ban as mirrored by the FTC’s failure to supply a reasoned clarification for its ban over different much less disruptive options. The FTC’s solely clarification for why it adopted a blanket rule moderately than conducting a case-by-case adjudication of particular non-competes was inconvenience, which the courtroom discovered fell far in need of the compelling justification essential to dismiss potential options.
For each causes—lack of statutory authority and arbitrariness—the courtroom concluded that the Closing Rule was “an illegal company motion” and located that the right treatment beneath the Administrative Procedures Act (APA) was to put aside the company motion in its entirety, as to all individuals. The choice thus has nationwide impact, is just not party-restricted, and impacts individuals in all judicial districts equally. In different phrases, the Closing Rule is DOA. Although the FTC has urged it should enchantment the choice and plans to proceed to look at non-compete agreements on an as-applied foundation, for now, employers can relaxation straightforward that the draconian Closing Rule is put aside and that their non-compete agreements with staff will survive offered they adjust to relevant state and native legislation. Given the heightened scrutiny round such agreements, employers are inspired to evaluation their template agreements with employment counsel.