Noncompete Ban Revisited
Employers should be mindful of this trend
In an article published by LBT, in May 2024, I alerted readers to a nationwide directive enacted by the Federal Trade Commission banning the use of non-compete covenants (including agreements, and provisions in employment contracts). As explained in the article, the ban not only purported to eliminate the use of non-competes for many categories of workers but imposed an obligation on employers to contact current and former employees, subject to non-compete covenants, to advise them that they were no longer enforceable.
As expected, on August 20, 2024, in advance of the ban formally going into effect on September 4, 2024, the Federal District Court for the Northern District of Texas issued a nationwide stay of the ban’s enforcement. In the case, Ryan LLC v. Federal Trade Commission, the court invalidated the FTC rule because the agency, among other things, exceeded its authority under the FTC Act, which arguably precludes the agency from issuing substantive rules. The court also held that the rule was arbitrary and capricious because limited studies were conducted concerning the need for and proposed effect of such a rule.
The court’s determination will likely be appealed to the Fifth Circuit Court of Appeals, but legal commentators are critical of the prospect for a reversal. At least now, for all intents and purposes, the rule is dead in the water.
But even so, the issuance of the ban on non-compete covenants and concurrent moves by certain states to restrict their application suggest that the issue is a live one and should not be ignored by employers who frequently include these restrictions in their employment agreements and manuals.
In 2024, California expanded its own ban against non-competes to cover out of state contracts. The new California law also includes affording employees a private right of action against employers who illegally impose such restrictions. In New York, in June 2023, the State legislature passed a bill that would have banned most non-competes and would have allowed employees to sue for liquidated damages up to $10,000 in connection with the illegal use and enforcement of such provisions. This legislation was ultimately vetoed by the Governor of the State, but the issue is likely to resurface.
The upshot is that employers should be mindful of this trend and consider taking proactive steps to modify their contracts and policies accordingly. For example, non-compete covenants should not be included in contracts of low wage workers and, even with respect to executive level employes, should be restricted to those who have access to legitimate confidential information the use of which would likely cause the employer competitive harm. In fact, the original purpose behind non-competes was to prevent employees with knowledge about a business’s proprietary information from using such information unfairly to compete directly or indirectly with the former employer.
Over time, however, the use of these provisions expanded broadly to be included in the agreements of most employees, many of whom had no access whatsoever to their business’s proprietary knowledge. Even though most workers likely would not be sued for violating such provisions, their potential application could serve as a chilling effect on future employment. At the end of the day, it is the abuse of these covenants that has yielded such a backlash among policy makers. Taking in account the original purpose behind these covenants should allow employers to craft more nuanced employment policies to combat truly anticompetitive conduct.
