April 30, 2024: FTC Nationwide Non-Compete Ban Faces Immediate Legal Challenges
Everyone has been asking about the FTC’s new Final Rule banning non-competition agreements nationwide, so much so that we’ve already accumulated enough FAQ’s for a supplemental “extra” edition of our humble law blog (“blawg,” if you will). In this supplemental release, we will discuss the two most common questions we have been hearing all week:
Are there any exceptions? Or, alternatively, “Please let there be exceptions!”
Yes! But don’t celebrate just yet, because unlike most things in labor and employment law, these exceptions provide absolutely no gray area; you either instantly and unambiguously qualify 100%, or you don’t qualify at all.
We won’t keep you in suspense. The exceptions to the FTC’s non-competition ban are those industries over which the FTC has no authority:
Non-profit Organizations
Banks
Savings and Loan Institutions
Federal Credit Unions
Common Carriers
Air Carriers and Foreign Air Carriers
Persons and Businesses subject to the Packers and Stockyards Act
In addition, there are a small handful of circumstances in which a non-competition agreement can still be enforced:
Existing agreements for “senior executives” (defined as workers earning at least $151,164 per year AND who are in a “policy-making position.”
The FTC defines “policy-making position” as an entity's president, chief executive officer, or equivalent, thus most high earning supervisors won’t necessarily qualify.
Non-competes entered into in connection with the bona fide sale of a business.
Non-competes enforced where the cause of action accrued prior to the Final Rule’s effective date.
Note that this doesn’t mean non-competes entered into before the Final Rule takes effect remain enforceable; they don’t.
This just means that any breach of a non-competition agreement prior to the Final Rule’s effective date remains actionable even after the Final Rule takes effect; any breach occurring after the Final Rule kick in remains forever inactionable.
This is much to take in. If you feel like you or your organization might qualify for any of the aforementioned exceptions, we’d be happy to talk it over with you personally, but for this article we want to highlight one particularly tricky exception: non-profit organizations.
The FTC has made it clear they will not tolerate any gamesmanship in regard to this Final Rule. To that end, they’ve made it clear that any alternate mechanism that effectively functions as a non-competition agreement will be treated as a non-compete agreement for all intents and purposes under the Final Rule. So nondisclosure agreements, training repayment agreements, non-solicitation agreements, no-hire agreements, and “no-business” agreements – each of which (and indeed, most all labor and employment firms) we fully intend to use to safeguard your legitimate business interests in place of non-competition agreements – will all have to walk a very thin line to ensure that such agreements do not “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends,” because as far as the FTC is concerned, any agreements to that effect are just non-competition agreements in fake mustaches and wigs, no matter what we call them.
The Sensenig Law Firm will continue to make appropriate adjustments to our clients’ agreements as guidance and caselaw surrounding the Final Rule develops. In the meantime, this brings us to our final point about exceptions: non-profit organizations.
Non-profit organizations simply are not within the FTC’s jurisdiction, so the FTC’s Final Rule does not apply to non-profits…… But remember what we just said about non-competes by any other name? The FTC has made it very clear that the mere fact of an entity’s currently unchallenged non-profit status will not act as a full bar to challenging non-competition agreements under the new Final Rule. Now don’t get us wrong: a non-profit entity is absolutely immune to the FTC’s Final Rule, and anything else the FTC does, for that matter. But it won’t be enough to just staple your tax form showing your non-profit status to a Motion for Summary Judgment attempting to enforce a non-compete agreement and call it a day. The reason that just demonstrating non-profit tax status won’t be enough is best illustrated by way of example: the NFL – easily one of America’s single most profitable entities – was classified as a non-profit organization until 2015. Suffice to say, non-profit organizations looking to enforce non-compete agreements should be absolutely sure that all their “t’s” are crossed, and all their “i’s” are dotted before they invite strict scrutiny into their non-profit classification.
What about legal challenges? Surely states (Texas) won’t stand for this!
You’re absolutely right. In fact, the first legal challenge landed in front of – where else? – the Northern District of Texas within less than twenty-four (24) hours of the FTC’s announcement of the Final Rule.
In Ryan, LLC v. Federal Trade Commission, Case No. 3:24cv986 (N.D. Tex. Apr. 23, 2024), Ryan, LLC is arguing, in its own words:
“The Firm’s complaint, filed in the United States District Court for the Northern District of Texas, contends that the FTC lacks the authority to prohibit non-compete agreements. It also argues that the FTC itself is unconstitutionally structured.”
Among other relief, the Ryan suit seeks to have the Final Rule vacated and set aside. These are exactly the sort of arguments the federal district courts of Texas love, because the Texas federal courts allow for a very succinct analysis that doesn’t leave any room for meaningful, substantive counterarguments: “We concur.” Spoiler alert: the Northern District of Texas is very likely to concur and hold that the FTC lacks the authority to prohibit non-compete agreements. We doubt the Texas Courts would go so far as to agree that the FTC itself is unconstitutionally structured, because that would invite many years of legal battles that might ultimately undermine their legal authority; it will be enough for them to simply gesture vaguely at the US Constitution and declare that, as a matter of law, that the FTC didn’t have the authority to issue this Final Rule. Think Game of Thrones…… Winter is coming.
The question then is whether the Northern District of Texas will be able to block the FTC’s Final Rule nationwide, or just within the Lone Star State. Ryan, LLC for its part, is seeking nationwide relief.
The Northern District of Texas won’t have to go it alone, as the US Chamber of Commerce (“USCC”) was right behind Ryan, LLC with a lawsuit filed in the Eastern District of Texas. The USCC is moving for a declaratory judgement holding that “The Noncompete Rule is arbitrary, capricious, or otherwise contrary to law within the meaning of the Administrative Procedure Act, see 5 U.S.C. §706(2)(A),” and seeking injunctive relief “vacating and setting aside the Noncompete Rule in its entirety pursuant to the Administrative Procedure Act, see 5 U.S.C. §706(2),” and “An order permanently enjoining the FTC from enforcing the Noncompete Rule against Plaintiffs’ members.” Whatever the ruling from the Texas federal courts may be, will that ruling have any impact outside the State of Texas? The USCC is pursuing a Declaratory Action, unlike Ryan, so the Texas Eastern District’s ruling might actually be narrower than the Texas Northern District’s ruling.
Finally, ATS Tree Services, LLC v. Federal Trade Commission was just filed in the Eastern District of Pennsylvania, making all the same arguments as Ryan and the USCC, but under the mantle of “small business.” We must assume that ATS Tree Services, LLC’s attorneys didn’t want to compete for the spotlight in Texas against two enormous, nationwide entities, because Texas is known as a jurisdiction that is proudly anti-government-agency disposition. Like Ryan, ATS Tree Services, LLC is seeking nationwide relief from the FTC Final Rule.
With these challenges, employers need to be circumspect about their next steps. The Sensenig Law Firm will shakes its vintage Magic 8 Ball and the predictable answer is that the FTC’s Final Rule will be delayed beyond the FTC’s desired effective date of one hundred and twenty (120) days from publication, meaning that even if the Final Rule does take effect, this Firm and you should have ample time to possibly shift all of your restrictive covenants agreements away from non-compete provisions, and towards nondisclosure agreements, training repayment agreements, non-solicitation agreements, and non-acceptance agreements, which – when drafted with sufficient care – can protect your legitimate business interests (including your valued customer base) as strongly as a non-competition agreement.
This is an issue that will continue to evolve. The Sensenig Law Firm will keep you informed as the updates occur.