A federal district court in Texas ruled in August that the Federal Trade Commission’s new rule banning non-compete agreements between employers and employees nationwide is unlawful, putting an indefinite stay on its implementation.
Lawsuits were filed almost before the web page displaying the rule’s text finished loading, with the U.S. Chamber of Commerce leading the way. At least one suit was successful; the U.S. District Court for the Northern District of Texas granted a summary judgment to throw out the case, ruling that the regulation was unlawful because the FTC had exceeded its authority under the law.
The ruling barred the FTC from starting to enforce the rule as scheduled — that is, from September 4 this year.
The ruling, which the FTC has promised to appeal, has left the employer community in a state of limbo: should firms keep in place their non-competes and comply with the stayed rule or should they comply, anticipating that it will eventually be upheld?
The federal agency defines non-compete agreements as contracts that bar workers from accepting jobs with competing employers or starting their own business that will compete with their employer after leaving their job.
The rule prohibits employers from enforcing any non-compete clauses entered into with most workers, including employees, independent contractors, interns, volunteers, apprentices, and sole proprietors providing services to businesses.
It makes an exception for “senior executives,” defined as those:
- In positions where they have “final authority to make policy decisions that control significant aspects of a business entity,” and
- Whose total annual compensation is at least $151,164.
Non-compete agreements in force with senior executives before the rule’s effective date will still be enforceable; those entered into after the effective date will not be.
The rule also requires employers to notify employees in writing that their current non-compete agreements are void.
The takeaway
As mentioned, the FTC is expected to appeal the Texas court’s ruling. In the meantime, suits challenging the rule are pending in Florida and Pennsylvania. If the courts in either of those cases uphold the rule, the conflict with the Texas ruling could put the regulation on the path to consideration by the U.S. Supreme Court.
Even if the courts permanently strike down the rule, state lawmakers across the country are considering bills that would ban the use of non-competes in their jurisdictions.
Four states, both red and blue, have already banned them; 33 other states and the District of Columbia restrict their use. States such as Illinois, Rhode Island and Wisconsin have considered bans, but not enacted them as of yet. Businesses located in these states should be aware of what the current laws mean and the potential effects of future laws.
Employers who believe that using non-compete agreements benefits their businesses should write them so that they apply narrowly.
That means they should be tailored to protect the company’s legitimate business interests and not restrict an employee’s ability to work in a broader field beyond what is necessary to safeguard sensitive information or customer relationships; this increases the likelihood of the agreement being enforceable in court.
The fate of the federal ban is unclear, but it is certain that the use of non-compete agreements will remain controversial. If the rule is eventually ruled illegal, look for more states to bar the use of non-competes through legislation.
In short, if you still have non-compete agreements in place, you should use them with caution.