We Have Met the Enemy… Texas Court Strikes Down FTC Non-Compete Ban
Last week, a Texas Federal Court granted a permanent injunction that strikes down the Federal Trade Commission’s (“FTC”) much-maligned ban on employee non-compete agreements. Many tout this ruling as a HUGE victory for employers. But which employers? Current ones? Future ones? Perhaps “we have met the enemy and he is us” (thanks Walt Kelly and Pogo).
Many, many businesses require their employees (especially high-level management, technical and sales personnel) to sign non-compete agreements as a condition of taking a job. Non-competes prohibit employees from competing with their employer in a given area, for some period of time, and in a particular line of business.
Sure, the goal of a non-compete agreement is to prevent a valued employee from walking out the door and going to work for a competitor. Sounds great, right? You can use that nifty document to protect yourself from the gaggle of miscreants you hired who’re just itching to find the next best gig and then kill your business.
Now put on a different pair of shoes. Suppose you’re an employer who’s just offered a job to Jane Sixpack who you want to be your next valued employee. And then, whoops, you learn she signed a non-compete agreement for her current employer. With a sigh, you call your lawyers and ask (and pay) them to tell you whether you can hire Jane. The legal advice you’ll receive is a dressed-up version of “it depends.”
It depends on whether the restriction on competition is reasonable. Whether it’s reasonable (or unreasonable), in turn, depends on the agreement’s scope, duration, and geography. If you operate a sandwich shop and your non-compete prohibits employees from working at any sandwich shop nationwide for ten years, that’s probably unreasonable. On the other hand, if you run a company that sells widgets in Gotham City and the noncompete prohibits members of your sales team from taking a job with another widget seller in the Gotham metropolitan area for a period of six months, that agreement likely passes the smell test.
All this further depends on what state’s law governs your agreement because there’s a patchwork of laws from state-to-state. Some states ban non-competes outright; others ban them for lower-paid employees. Many leave the issue to their courts who assess non-competes on a case-by-case basis.
In comes the FTC’s ban on non-competes which became a final rule on April 23, 2024. Were it to have gone into effect next Wednesday (ironically just after Labor Day), employers would be prohibited from requiring their employees to sign non-competes going forward and be barred from enforcing existing non-competes except those for senior executives. Employers also would be required to notify employees that existing noncompete agreements no longer would be enforced (except, again, for senior executives).
Shortly after the rule was made final, lawsuits challenging the ban were filed in a number of federal courts. Some of the Courts that have ruled on the ban barred enforcement of the rule temporarily with respect to the parties in the court’s jurisdiction. A federal court in Pennsylvania denied a request for a preliminary injunction to bar enfocement of the regulation. The Texas decision, however, is the first ruling that’s both permanent and nationwide. Surely, that decision will be appealed; therefore, it might be reversed. Having looked at the recent decisions, I think the FTC’s rule is (was?) questionable. The FTC’s assertion of authority and the unlimited nature of the prohibition just went too far.
For now, the FTC rule is a dead letter, and employers will once again look to the “it depends” rule. Yet, the whole “it depends” analysis makes it hard to find the fine line between reasonable protections versus unreasonable restrictions on an employee’s right to get a new job and their prospective employer’s ability to hire them.
The Texas win may be viewed as a victory for employers. However, employers sometimes are former employers and sometimes they are prospective employers. Businesses may want to be protected from their enemies. But, as Pogo suggested, sometimes the enemy will be us.
All employers would be well-served by a reasonable nationwide non-compete rule. The FTC rule isn’t it. As I suggested last year, the bipartisan legislation (the “Workforce Mobility Act”) introduced by Senators Chris Murphy (D-Connecticut) and Todd Young (R-Indiana) could offer a good starting point.