The Federal Trade Commission is prohibited from enforcing its rule to ban most noncompete agreements, which was slated to go into effect September 4. On August 21, a federal court in Texas held that the FTC exceeded its authority in issuing this rule and has issued an Order preventing the FTC from enforcing the rule nationwide. Now that the FTC’s noncompete rule is not going into effect next month, some employers and employees are facing some sticky issues as many on both sides had taken action in anticipation of the rule going into effect.
This decision in Ryan LLC v. Federal Trade Commission to invalidate a rule that would have banned noncompetes in employment for all but the most senior executives may not be the end of the story however. The FTC is considering appealing the decision and there are at least two other cases pending in other federal district courts about the validity of the FTC noncompete rule, Based on a preliminary ruling from at least one of these courts, we could very well see a different outcome than the court in Ryan LLC reached. Should that occur, the U.S. Supreme Court could ultimately determine the viability of the rule.
Indeed in July, the District Court for the Eastern District of Pennsylvania found the FTC’s noncompete rule to be a valid use of the FTC’s power in a preliminary decision in ATS Tree Services LLC v. Federal Trade Commission. That court refused to stop the FTC noncompete ban from going into effect against the Plaintiff in that case. The parties in that case are presently preparing briefs so the court can issue a final decision on the validity of the FTC rule. Before the Ryan decision was issued this week, the Plaintiff in the ATS Tree case asked the court to issue a final decision in that case by November 27, noting that the court in Ryan was expected to be ruling soon on the same legal issue. The court has not yet set a hearing date for this stage of that case in ATS Tree.
Meanwhile we are also awaiting a final decision from the District Court, Middle District of Florida, Ocala Division on the enforceability of the FTC’s rule. In mid-August the Court in Properties of the Villages v. Federal Trade Commission held at a preliminary stage that the FTC exceeded its authority when issuing the noncompete rule and stopped it from going into effect, but only against the Plaintiffs in that case. No hearing date in that case has yet been set for a final decision.
On its website, the FTC acknowledges the Texas District Order stopping the FTC from enforcing the noncompete rule but notes that the agency is considering whether to appeal that decision and that it will continue to evaluate the enforceability of noncompetes on a case-by-case basis.
For years, many states have been trying to ban or severely restrict noncompetes, and this so-far unsuccessful attempt by the FTC to ban most noncompetes nationally and the uncertainty of how this will shake out will likely ignite more state legislative action.
Now that the FTC’s noncompete rule is not going into effect next month, some employers and employees are facing some sticky issues. To prepare for the FTC's rule, many employers have been reviewing the scope of their non-compete provisions and the scope of employees subjected to them. Some employers had already sent out notices to employees (other than senior executives) with existing noncompetes indicating that they would not be enforcing them as the FTC's rule had a notice provision requiring employers to do so. Trying to claw that back now is tricky if affected employees relied on that notice to join a competitor or start a competing business. Indeed, employees with existing noncompete restrictions that agreed to start a job with a competitor of their employer or to start a competing business after September 3 now stand to be in violation of their existing restrictions if they do so. Affected employers and employees should seek guidance from counsel on these issues.
