- Second court takes issue with FTC rule. The U.S. District Court for the Middle District of Florida ruled on Aug. 14 that the FTC’s noncompete ban is not enforceable. This aligns with a July 3 ruling by the U.S. District Court for the Northern District of Texas.
- All eyes are turning to Texas. The judge in the Texas case has said she will determine her final ruling by Aug. 30. That ruling could delay, invalidate or enjoin the FTC final rule.
- But wait, there’s more. Pennsylvania has enacted a law that will ban noncompetes for most medical professionals in that state. The law takes effect on Jan. 1, 2025.
(Editor’s note: Workspan Daily is actively covering news surrounding the noncompete final rule. Please check back to this article for updates. … Last update: 3:20 p.m. Central on August 15.)
The U.S. Federal Trade Commission (FTC) final rule banning noncompete agreements in most instances takes effect nationally on Wednesday, Sept. 4. As of the posting of this news article:
- The rule is poised for takeoff, and
- The runway for employers to comply is short.
However, will the regulation truly, really, actually get off the ground?
The court system has — and will have — its opinions.
On Wednesday, Aug. 14, the U.S. District Court for the Middle District of Florida ruled the FTC’s noncompete ban is not enforceable. In the case Properties of the Villages, Inc. v. FTC, Chief Judge Timothy Corrigan sided with the plaintiff’s claim that the FTC didn’t have the authority to issue such a broad rule, saying the commission’s rulemaking targeted a matter of “extraordinary economic and political significance” that Congress did not empower the FTC to address. A full written opinion has yet to be issued, but the court’s minute order suggested relief only applies to the plaintiff as an employer (a Florida-based real estate company) and to no one else.
The verdict appears aligned with that of the U.S. District Court for the Northern District of Texas. On July 3, Judge Ada Brown sided with the plaintiff/employers in the case Ryan LLC v. FTC, writing in her opinion, “The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.” Like the Florida case, Brown limited her “preliminary” ruling (more on that in a minute) to the plaintiff — in this instance, a tax software and services firm and the plaintiffs-intervenors (the U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce) in their direct roles as employers.
These two verdicts contradict the U.S. District Court for the Eastern District of Pennsylvania. On July 23, Judge Kelley Brisbon Hodge sided with the defendant in the case ATS Tree Services LLC v. FTC. In her ruling, Hodge opined the FTC had clear legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition.”
So, what comes next? It’s back to Texas and Judge Brown.
In her “preliminary” decision, Brown wrote, “The court intends to rule on the ultimate merits of this action on or before August 30, 2024.” At hand is whether the judge determines she has the desire, ability and legal power to issue a broader ruling. In the Ryan case, the plaintiff requested nationwide injunctive relief. In limiting her initial decision, Brown’s written opinion noted no party had briefed the court why nationwide relief was necessary, and the U.S. Chamber of Commerce had not briefed associational standing such that relief could be granted to its members.
If Brown decides against issuing a broader ruling, the Sept. 4 noncompete ban will indeed get off the ground for the vast majority of U.S. companies (the Texas and Florida court plaintiffs being among the exceptions). If, however, she determines a broader blockage is appropriate, her ruling options may include:
- A delay of the FTC final rule,
- An invalidation (a weakening or disablement of the final rule), or
- A full or partial enjoinment (prohibition of the final rule’s action items).
One thing is certain. Brown will likely base a final decision on her court’s determinations that:
- The FTC does not have the statutory authority to engage in competition-related rulemaking.
- The noncompete rule is “arbitrary” and “capricious.”
- The plaintiffs and intervenors had satisfied the standard to obtain injunctive relief.
As the runway toward the end-of-August Brown decision and Sept. 4 FTC compliance date shortens, what can/should employers do?
The Fisher & Phillips LLC law firm, in a Aug. 15 post on its website, advised organizations to consider five action steps:
- Develop a personalized strategy plan. Work with your legal counsel to determine a solution that works for your business.
- Use the next few weeks to take stock. Take some preliminary steps to hedge your bets on the court outcome(s).
- Plot alternatives. Examine if other ways exist to protect your interests.
- Strengthen other restrictive covenants. Review all agreement clauses (nonsolicitation, nonrecruitment, nonservicing and nondisclosure) for compliance with state laws.
- Get your trade secrets house in order. Identify your trade secrets and make sure proper policies and procedures are in place to protect them.
Such preparatory steps may well be good strategy. While the FTC rule and challenges to that federal rule have garnered significant attention over the past several months, noncompete bans have gained momentum at the state level. The legislation landscape shows:
- Seven states (Arizona, Connecticut, Georgia, Kentucky, Missouri, New York and Tennessee) recently proposed bills to restrict (or further restrict) noncompete clauses.
- Three states (Iowa, Louisiana and Pennsylvania) have noncompete laws that will take effect in the near future.
- Twenty-five states (plus the District of Columbia) have laws in effect that limit noncompete clauses in some form: California, Colorado, Connecticut, Delaware, Florida, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Virginia, Washington and West Virginia.
The FTC estimates 30 million people, or 20% of U.S. workers, have signed noncompetes. The commission enforces federal antitrust laws.
Pennsylvania Bans Noncompetes for Most Medical Professionals
In a related development on noncompete agreements, the Commonwealth of Pennsylvania enacted its Fair Contracting for Health Care Practitioners Act, which will predominantly prohibit employers in that state from enforcing noncompete clauses for medical professionals.
The new law, which takes effect Jan. 1, 2025, generally prohibits noncompetes from being enforced against doctors, osteopaths, registered nurse anesthetists, registered nurse practitioners and physician assistants.
The law provides for a handful of exceptions. Most notable is that employers may include one-year noncompete clauses to counter potential business damage caused when a healthcare professional decides to exit within their first year of employment.
Pennsylvania is one of several states that have taken up legislation on noncompetes within the healthcare industry. Among others:
- Maryland signed a bill into law (covering certain healthcare and veterinary professionals) in April.
- Ten states (Arizona, Colorado, Connecticut, Illinois, Louisiana, Massachusetts, Missouri, New Jersey, Ohio and Rhode Island) have pending legislation.
- Four states (California, Minnesota, North Dakota and Oklahoma) have laws banning noncompetes in all industries.
Much of this action is occurring because the FTC noncompete rule, for the most part, does not cover nonprofit entities (the FTC stance is that a nonprofit corporation is subject to the rule only if it is “organized to carry on business for its own profit or that of its members.” Many healthcare organizations in the U.S. are set up as nonprofits.
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