The FTC’s Noncompete Rule on Hold in Texas
Jul 18, 2024A Final Decision is Expected at the End of August
The United States District Court for the Northern District of Texas (the court) recently enjoined the Federal Trade Commission (FTC) from enforcing its noncompete rule (the rule) against the plaintiffs until the court decides on the ultimate merits of the action.
The rule being challenged, which the FTC announced on April 23, 2024, prohibits almost all noncompete agreements. It is scheduled to take effect on September 4, 2024.
The preliminary decision in Ryan, LLC v. FTC is narrow and only applies to the named parties in the lawsuit. The final decision is expected before August 30, 2024, and the possibility of a nationwide injunction — or vacatur — being part of that final decision is well within the realm of possibility.
The Preliminary Decision
In her decision, Judge Ada Brown unequivocally enjoined the FTC noncompete rule, saying that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).” Yet despite this articulation of clarity about the rule’s shortcomings, Brown also said that the plaintiffs failed to provide a “briefing as to how or why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs at this preliminary stage.”
The court also explained that Section 6(g) of the FTC Act is a “housekeeping statute” authorizing only “rules of agency organization procedure or practice.” The noncompete rule is, according to the court, “arbitrary and capricious” because it is “unreasonably overbroad without a reasonable explanation. It imposes a one-size fits all approach with no end date, which fails to establish a rational connection between the facts found and the choices made.”
Loper Bright’s Coattails
This Texas decision follows the United States Supreme Court’s (USSC) recent ruling in Loper Bright Enterprises v. Raimondo, which overturned the longstanding doctrine of Chevron Deference. This USSC ruling puts the noncompete rule in obvious and unavoidable legal jeopardy.
The doctrine of Chevron Deference — based on the 1984 USSC decision in Chevron USA Inc. v. Natural Resources Defense Council Inc.. — gave agencies broad latitude in interpreting ambiguous language in laws associated with their authority. With this legal principle set aside, it is now up to the courts to decide “all questions of law” and “interpret constitutional and statutory provisions.” The ruling in Ryan, LLC v. FTC echoes the sentiment expressed by the USSC in overturning Chevron. Judge Brown said that the “role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.”
Looking Ahead
The Ryan case is not the only legal challenge to the noncompete rule, and this initial preliminary injunction brings significant uncertainty to the rule’s ultimate survival. But even if litigation resultsin a complete or partial invalidation of the federal rule, enforcement of state noncompete restrictions will continue.
In New Hampshire, where Orr & Reno is located, the courts evaluate non-compete contracts on a case-by-case basis, with some exemptions providing specific categorical prohibitions (see below). Non-competes are enforceable only if the agreement is reasonable in scope and tailored to “protect the employer’s legitimate business interests.” New Hampshire legislation enacted in 2014 requires employers wishing to execute a non-compete agreement as a condition of employment to disclose that information before the employee accepts an offer of employment (RSA 275:70). Exemptions include physicians, nurses, and podiatrists. In 2019, related legislation (RSA 275-70-a) prohibited non-compete agreements with “low-wage” employees that would restrict a low-wage employee from performing work for another employer. The legislation defines “low-wage” employees as those earning less than or equal to 200 percent of the federal minimum wage.
If you have any concerns about your current noncompete agreements — or wish to explore the role of restrictive covenants in your overall business strategy — don’t hesitate to contact Orr & Reno for assistance.
