The real question is not so much whether a non-compete is fair or not – it is what agency/legislature should have the power to restrict them?
Here’s what the Federal Trade Commission put on its website after Judge Ada Brown’s ruling last week –
On August 20, a district court issues an order stopping the FTC from enforcing the rule on September 4. The FTC is considering an appeal. The decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.
Attempts to ban or limit non-competes on a state level have been ongoing for years. The Texas Non-Compete statute has been around in some form since 1989 and if you keep an eye out every year there are attempts by state legislatures to limit or ban non-competes. Of course, like any legislation, those attempts are dictated by politics and what party controls the state house.
A few years ago non-competes made national news when it came to light that some Jimmy John’s locations were trying to institute non-compete agreements for sandwich makers. Suffice it to say that most Americans don’t think that sandwich makers should be subject to a non-compete.
So, there was some public outcry on the issue and the Biden Administration began trying to take down the very concept of a non-compete through the Federal Trade Commission in 2021. There was a draft rule followed by lawyer comments, and ultimately final version unveiled in April 2024. The rule was challenged in multiple courts and Judge Ada Brown, here in the Northern District of Texas, struck down the rule on August 21
The FTC contains commissioners that are appointed by the President. Should the FTC be able to knock down the laws of each state as it relates to non-competes? Judge Brown and others said no. Now the issue will wind its way through our appellate courts (starting with the 5th Circuit) and likely make its way to the Supreme Court. If I was a betting man I would put money on Judge Brown’s opinion being affirmed and the Supremes holding that each state should address the issue. (Seem similar to any other high profile issues we’ve seen the Supremes address lately?)
What do employers do? The same things they should have been doing before: (1) determine in what situation the non-compete is appropriate – not every employee needs one; (2) determine what restrictive covenant is appropriate – a traditional non-compete, a non-solicit for employees; non-solicit for customers; confidentiality provisions; and/or garden leave provisions. (3) tailor the covenant appropriately in terms of duration and scope – the narrower, the easier to defend; and (4) evaluate the applicable law. For example, good luck enforcing a non-compete in California.
At the end of the day employers need to draft non-competes with an eye toward enforcement. Draft provisions that are going to be enforceable down at the courthouse – not provisions that look intimidating on paper. .
So, for the near term the FTC rule is dead. We should continue to focus on what our state legislatures and court are doing – that is where non-compete reformation will come from – not the FTC.
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