By Mary C. Moffatt
Non-competition agreements in the employment context have been around for centuries. During his 2020 presidential campaign, Joe Biden vowed to take on non-competes and no-poaching agreements. In fulfillment of that promise, in July 2021, President Biden issued Executive Order 14036, observing that “powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs.” He went on to encourage the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses…that may unfairly limit worker mobility” and “to enforce the antitrust laws fairly and vigorously.” On January 19, 2023, the FTC issued its proposed Non-Compete Clause Rule (88 FR 3482), which was finalized and published in May 2024.
Fast forward to August 20, 2024 – United States District Judge Ada E. Brown of the Northern District of Texas issued an Order to Set Aside the Federal Trade Commission’s Non-Compete Rule. Ryan LLC, Chamber of Commerce et al. v. Federal Trade Commission, U.S.D.C.N.D. Texas, Case No. 3:24-cv-986 (hereinafter “Ryan”). After a thorough analysis, the Texas court determined that the appropriate remedy was to set aside, on a national basis, the FTC’s Final Rule.
Judge Brown’s Order does not terminate the issue, however.
While employers should have a collective sigh of relief from Judge Brown’s Order in Ryan, the FTC will likely appeal the Ryan decision to the Fifth Circuit Court of Appeals, and possibly ultimately appeal to the Supreme Court. If that fails, the FTC may simply go back to the drawing board and re-work the Rule.
Background.
Readers will recall that on May 7, 2024, the FTC published its final Non-Compete Rule in the Federal Register, declaring that non-compete clauses in employment agreements, with very few exceptions, are “unfair methods of competition” under §5 under the FTC Act. The effect of the Final Rule was essentially to ban all noncompete agreements for any worker in the United States, regardless of industry, title, job function, or compensation. The Final Rule was slated to become effective 120 days from publication in the Federal Register, or September 4, 2024. The impact would have rendered most non-compete agreements across the nation unenforceable.
The Final Rule was very broad to say the least. Under Section 910.1 of the Final Rule, the FTC defined a “non-compete clause” as follows:
…a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.
16 CFR 910.1.
The FTC has contended it would not have impacted other types of restrictive covenants, such as non-solicitation, non-disclosure, and training repayment agreements. However, in the preliminary comments to the actual Rule provisions, the FTC specifically addressed such agreements by stating that they are covered by the Final Rule only if they are “so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, (then) such a term is a non-compete clause under the Final Rule.”
The FTC references nondisclosure agreements (NDAs), training repayment agreements, non-solicitation agreements, no-hire agreements, and “no-business” agreements as examples to evaluate whether the functional effect is applicable, that is “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”
Quoting from a First Circuit Court of Appeals case, the FTC states in the Final Rule:
As the First Circuit stated in a recent opinion, ‘‘[O]verly broad nondisclosure agreements, while not specifically prohibiting an employee from entering into competition with the former employer, raise the same policy concerns about restraining competition as noncompete clauses where, as here, they have the effect of preventing the defendant from competing with the plaintiff.’’ Quoting, TLS Mgmt. v. Rodriguez, 966 F.3d 46, 57 (1st Cir. 2020).
Under the FTC’s proposed Final Rule, only existing non-competes for “senior executives” would be permitted to remain in force, but the Rule would prohibit new non-competes even for senior executives. The Final Rule defined ‘senior executive’ as individuals (1) earning more than $151,164 annually and (2) in a ‘policy-making position,’ which the FTC defined as a position with final authority to make policy decisions that control significant aspects of the business, but it does not include authority (that is) limited to advising or exerting influence over such policy decisions or authority for only a subsidiary of or affiliate of a common enterprise.
The Ryan case in Texas.
In response to the FTC rule, the plaintiffs in Ryan sued the FTC, asserting the agency acted without statutory authority, and that the FTC’s actions were arbitrary and capricious.
In its 27-page Order, the Ryan Court granted summary judgment to the plaintiffs, concluding that the FTC promulgated the rule in excess of its statutory authority. The Court held the FTC rule is “arbitrary and capricious” – essentially it is “unreasonably overbroad without a reasonable explanation.” The Ryan Court further found the rule was based on “inconsistent and flawed empirical evidence,” that it failed to consider the “positive benefits of non-compete agreements, disregarded the substantial body of evidence” supporting non-compete agreements, and failed to address and consider alternatives to the sweeping rule.
The ATS Tree Service case in Pennsylvania
In contrast to the Ryan decision, a federal court in Pennsylvania found the FTC Final Rule lawful and enforceable in the case of ATS Tree Service v. FTC, (Case No. 24-cv-1743 (E.D. Pa, 2024). By way of the Memorandum and Order dated July 23, 2024,Judge Kelley Hodge of the Court found the Plaintiff failed to establish irreparable harm so as to support a preliminary injunction with respect to the FTC’s Final Rule. The Court also found that the Plaintiff was unable to establish a likelihood of success as to the merits of the case.
ATS is a professional tree service, known for expertise in the tree care business. ATS spends “thousands of dollars” training its employees, some of whom obtain arborist certifications as a result. ATS employees are entrusted with proprietary information and sign non-compete agreements upon hire, which last for one year after leaving employment with ATS.
ATS argued the FTC Final Rule would cause irreparable harm in the form of monetary losses and business expenses which it would likely incur due to the potential loss of employees and costs of responding to the Final Rule. However, relying on Third Circuit Court of Appeals authority, Judge Hodge held that “monetary loss and business expenses alone are insufficient bases for injunctive relief” because evidently, at least in the Third Circuit, “a loss of money” does not constitute an injury.
The ATS Court further sided with the FTC in finding that the Agency acted within its authority under the (FTC) Act in designating all non-compete clauses as “unfair methods of competition.”
The ATS Court’s Order denying the injunction does not end the ATS case. In a Joint Status Report filed on August 6, the parties agreed upon dates for summary judgment motions to be filed and ATS specifically requested the Court to rule on those Motions by November 27, 2024.
The Properties of the Villages case in Florida
A federal court in Florida also granted a preliminary injunction staying the enforcement of the FTC’s Final Rule, but the injunction only operates as to the plaintiff in that particular case. Unlike Ryan, the Plaintiff in Florida did not seek a nationwide injunction. Properties of the Villages v. FTC, Case No. 24-cv-316 (M.D.Fla. 2024).
Beware the Patchwork Landscape of Restrictive Covenants
Clearly, restrictive covenants in employment have come under fire across the nation.
For example, the FTC Final Rule is in some respects a lightweight compared to the law in Minnesota, signed in 2023 by Governor Tim Walz, who is now running for Vice-President of the United States. In Minnesota, only non-competes entered into prior to July 1, 2023 are permitted, but continued employment is not sufficient consideration to support a non-compete regardless of when it was signed. Agreements which prohibit competition post-employment which were signed on or after July 1, 2023 are banned in Minnesota, with two very narrow exceptions (the sale or dissolution of a business). Like the FTC’s Final Rule, the Minnesota 2023 law applies to employees and independent contractors. While the 2023 law does not apply to confidentiality, or non-solicitation agreements, on May 17, 2024 Gov. Walz signed a law banning non-solicitation provisions in staffing agency agreements. (MN SF 3852)
Likewise in other states, such as Oklahoma, North Dakota and California, non-competition agreements are illegal by law. Other states, such as Missouri, Montana, South Carolina and Washington, have laws that require employers to provide an employee with “new consideration” to support non-compete agreements and most of those laws specifically provide that “continued employment” is not sufficient consideration to support a non-compete agreement for an existing employee.
In addition, many states specifically exempt certain groups of employees from permissible non-competes based on job duties or salary level. For example, in Colorado, non-complete agreements entered on or after August 10, 2022 are permitted only as to “highly compensated employees” earning a salary set by statute ($123,750 as of 2024). Likewise, non-solicitation provisions in Colorado are only valid and enforceable against workers who earn 60% of the threshold amount for highly compensated workers.
CONCLUSION
Given the patchwork landscape and the increased challenges to restrictive covenants, employers utilizing non-compete agreements, and/or those who do business in states other than their own – (or who hire employees from other states) – are strongly advised to obtain legal advice with respect to a particular state law. Employers should be proactive to consult with counsel to evaluate the most effective and legally compliant way to protect proprietary data, trade secrets and confidential business information.
The FTC will very likely appeal the Ryan decision, but for now (and subject to further court orders), the FTC Rule against non-compete agreements has been set aside and will not go into effect.
Stay tuned for further developments.
Mary C. Mottatt, Member
Wimberly Lawson Wright Davies & Jones PLLC
Knoxville, Tennessee office
[email protected]