by JPeters | August 22, 2024 12:28 pm
A federal judge in Texas has struck down the new FTC rule[1] banning noncompete agreements, finding that the Federal Trade Commission[2] (FTC) had exceeded its authority. If it had gone into effect as scheduled on September 4, the Rule would have voided contracts prohibiting employees from moving to rival employers or starting a competitive business. An estimated 30 million employees in the United States, working in various fields[3], are subject to noncompete agreements.
The ruling United States District Judge Ada Brown of the United States District Court for the Northern District of Texas[4] issued a temporary and limited injunction[5] on the FTC rule in July. In her August 20, 2024 ruling, she made this permanent and nationwide.
“The Court concludes that the FTC lacks statutory authority to promulgate the Noncompete Rule and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action,” Brown wrote in her decision. The judge said the commission failed to furnish evidence about “why they chose to impose such a sweeping prohibition” instead of “targeting specific, harmful noncompetes,” thereby rendering the rule “arbitrary and capricious.”
FTC spokesperson Victoria Graham said[6] the agency was weighing a potential appeal. “We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages,” Graham said. “We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”
The US Chamber of Commerce welcomed[7] the court’s decision. Chamber President and CEO Suzanne Clark[8] said it was “a significant win” against government overreach. The Texas ruling is just the latest round in a legal tug-of-war between government agencies, business groups, and the federal court system. In addition to the Texas ruling, companies have sued the FTC in Florida and Pennsylvania to block the Rule.
In Pennsylvania, Judge Kelley Brisbon Hodge of the United States District Court for the Eastern District of Pennsylvania[9] concluded that the FTC has the legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition.” The court also held that the plaintiff had not established that it would suffer irreparable harm if the Rule went into effect.
In Florida, Judge Timothy Corrigan of the United States District Court for the Middle District of Florida[10] granted a preliminary injunction prohibiting enforcement of the Rule for the plaintiff but not anyone else.
What Now?
A variety of divergent rulings often indicate cases that the United States Supreme Court will eventually need to review. However, for now the pressure is off. The FTC’s Rule will not go into effect on September 4, and noncompete agreements remain largely governed by state law.
In New Hampshire, where Orr & Reno is located, the courts evaluate noncompete contracts on a case-by-case basis, with some exemptions providing specific categorical prohibitions (see below). Noncompetes 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 noncompete agreement as a condition of employment to disclose that information before the employee accepts an offer of employment (RSA 275:70[11]). Exemptions include physicians, nurses, and podiatrists. In 2019, related legislation (RSA 275-70-a[12]) prohibited noncompete 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.
Lindsay E. Nadeau[13] and Samuel R. Fuller[14]
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