Having the Talk: How Employers Should Prepare for Difficult Disciplinary Situations
May 14, 2024
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On Tuesday, August 20, 2024, Judge Ada E. Brown, a United States District Judge for the Northern District of Texas, delivered a nationwide victory to businesses and employers across the country when she granted Ryan LLC (a tax service firm) and the U.S. Chamber of Commerce's (the country's largest business lobby) Motions for Summary Judgment against the Federal Trade Commission ("FTC").
Judge Brown's ruling blocked the FTC's Non-Compete Rule scheduled to take effect September 4, 2024. She ordered that the Non-Compete Rule "shall not be enforced or otherwise take effect," fully nullifying it and blocking the FTC's would-be enforcement.
Background on the FTC's Non-Compete Rule
As a quick refresher (FTC Charges Forward with Sweeping Non-Compete Ban - Ward and Smith, P.A.), the FTC issued the Non-Compete Rule in late April 2024, and it was scheduled to go into effect on September 4, 2024. If the Non-Compete Rule had gone into effect on September 4, 2024, it would have resulted in sweeping changes in how employers protect against unfair competition, banning nearly all non-competition agreements in the employment relationship and requiring employers to affirmatively notify existing and former employees that their non-competes were no longer valid. According to the FTC, the Non-Compete Rule would have impacted approximately 30 million people. The same day the FTC voted to issue the Non-Compete Rule, Ryan LLC (later joined by the U.S. Chamber of Commerce and other intervenors) filed its lawsuit challenging the FTC's rulemaking authority and seeking to block the implementation of the Non-Compete Rule. We forecasted, then, that the Non-Compete Rule would face many legal challenges (which it has) and that its implementation would likely be thwarted altogether (which it has). While we did not have a crystal ball, Judge Brown's Order fell perfectly in line with our prediction for the fate (at least at the district court level) of the FTC's Non-Compete Rule.
Judge Brown's Analysis of FTC Authority
In her Order, Judge Brown provided an in-depth analysis of the FTC's statutory authority granted by the FTC Act (and the 1914 Congress). Her analysis explains the limited powers granted by Congress to an administrative agency, such as the FTC. Specifically, it concludes that the FTC lacks substantive rulemaking authority to prohibit practices it deems unfair methods of competition, thus exceeding its statutory authority in issuing the Non-Compete Rule. Similarly, Judge Brown examined the FTC's action under the Administrative Procedure Act ("APA"), concluding "the Rule is arbitrary and capricious because it is unreasonably overbroad . . . [and] imposes a one-size-fits-all approach . . . . The [FTC] 's lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious."
Potential Appeal and Future Implications
Although Judge Brown's Order is final, the FTC can (and has indicated that it likely will) appeal the decision to the United States Court of Appeals for the Fifth Circuit; however, the fate of the FTC's Non-Compete Rule hangs in the balance amid the results of the 2024 election and the outcome of several key cases revolving around executive agency authority and deference. Whether the FTC continues to fight this decision will depend on who is inaugurated in January 2025. Similar to the Obama Administration's Department of Labor ("DOL") Rule to increase the Fair Labor Standards Act ("FLSA") salary threshold in 2016 for exempt employees, when the Trump administration took office in January 2017, the DOL did not pursue its appeal any further. If, however, the Harris Administration takes office in January 2025 and the FTC continues to pursue its appeal of Judge Brown's decision, the FTC's Non-Compete Rule still faces an uphill battle, given the increased scrutiny around executive agency action. This is particularly true after the United States Supreme Court's 2023-2024 term in which several key decisions limited administrative agency action and overturned Chevron U.S.A., Inc. v. Nat. Res. Def. Council (which had been known as the "Chevron Deference" for nearly 40 years).
Key Takeaways for Employers
The good news for businesses and employers is that the FTC's Non-Compete Rule will NOT go into effect on September 4, 2024. However, this is one topic to put on your side burner and continue monitoring. There is a growing sentiment disfavoring restrictive covenants in the employment context. Other federal agencies, like the National Labor Relations Board ("NLRB"), have taken hardline approaches against employers restricting employees' actions during or after employment. Additionally, several states are tightening their requirements for non-competes, including banning non-competes in certain industries. While non-competes were spared from the chopping block on September 4, 2024, employers and businesses should take this near miss as a sign to closely re-examine their restrictive covenants, enforcement tendencies, and overall strategy for protecting legitimate business interests. Depending on what you are trying to protect, there may be creative (and less scrutinized) methods for protecting your legitimate business interests from unfair competition.
If you have questions about how the recent developments may impact your business or need guidance on drafting or enforcing non-compete agreements, we encourage you to reach out to our Labor and Employment attorneys. Our experienced team is here to help you navigate these complex issues and ensure that your business interests are protected effectively. Don't hesitate to contact us for personalized advice and support tailored to your specific needs.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.
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