By Mark Carey
On August 20, 2024, a federal court in Texas issued an Order barring the Federal Trade Commission from instituting the new rule banning noncompetition agreements nationwide. This was a blow to all employees nationwide. (Read the court (Ryan LLC v. FTC) decision HERE). Noncompetition agreements are an extremely important constraint on the working lives of employees and executives. I dove deep into this legal quagmire in an attempt to give you a straightforward explanation that will provide what the news media cannot. The following discussion unfortunately addresses the conflict between the rule of law and the current political cycle. But I offer an interesting viewpoint, the Texas decision is not controlling on employees outside of Texas and the FTC rule will be effective on September 4, 2024.
There is the “Law” and Then There’s Politics
First, what is meant by the rule of law. In its raw essence, courts are bound by previous case decisions, acts of Congress and procedures. The Administrative Procedure Act dictates how a court must address and resolve disputes involving agency rule making, here the Federal Trade Commission’s substantive regulation to ban noncompetition agreements in employment. Simply, the FTC cannot render arbitrary and capricious rules and must have the authority to make rules as directed by Congress. The Texas court said the FTC did not have this power, even though we all presume the FTC protects against unfair competitive corporate behavior and noncompete agreements squarely fit into the FTC’s jurisdiction.
Second, this is really a political issue to garner election support. In the “left” corner of the ring, there is a decision (FTS Tree Service v. FTC) by a Pennsylvania federal judge, a Biden appointee, that holds in favor of the FTC rule (read decision HERE). In the right corner of this heavyweight title bout is a Trump appointee in the Texas case above. The August 20, 2024, Texas decision banned the enactment of the FTC rule on noncompetition. The FTC has 60 days to file a notice of appeal from the August 20th, 2024, final decision. As of the date of this article, the FTC has yet to file a “notice of appeal” in the court docket, a rather simple procedural motion. I do not expect the FTC to wait very long to file this notice. Once filed, appellate procedure takes over and the FTC must comply with the 5th Circuit rules. I suspect the case will be expedited given the political leverage the FTC rule will have on voters.
Regarding the ATS Tree Service case in Pennsylvania, the Court issued a scheduling order on August 22, 2024, requiring ATS to file a motion for summary judgment by September 20, 2024, and the subsequent briefs filed thereafter. Unfortunately, a decision will not be rendered by this Court until after the November presidential election. This means the FTC fight will be held in the 5th Circuit Court of Appeals and the democrats must act fast if they want to push this case along before the election. The FTC could also push for an expedited review by the US Supreme Court pursuant to 28 U.S. Code 3904 (Expedited review of certain appeals of constitutional matters) and bypass the appeal to the 5th Circuit. Expedited appeals are rare but I believe the FTC rule warrants immediate constitutional review given the enormous economic impact on employees and executives whether or not the rule becomes effective on September 4, 2024. The economic impact on employers is de minimis, as the FTC indicated the cost of notifying employees is roughly $27 per employee. Employers have no grounds to argue the economics here, as they benefited financially for decades due to noncompete case law decisions in their favor.
It is just a matter of how politically important this issue is to voters. We have two political candidates running neck and neck (Harris vs. Trump) and the “political machines” in this country may force the courts to address this very important issue before November. If you are looking through the correct lens, Biden demanded the FTC issue the noncompete rule to garner favor among the nearly 160 million workers in this country in November; an estimated 30 million employees are covered by noncompete agreements. Nothing has changed regarding this initiative now that Harris has taken over the DNC nomination for President. Presumptively, Harris has adopted and embraced the FTC rule as she needs all the votes she can muster in her hyphenated election bid.
The FTC Rule is Still Effective on September 4th
I have poured over the Texas and Pennsylvania court decisions, and I have the following conclusions. Employees may still void their noncompete agreements because legally speaking the FTC rule has not been enjoined. We have two federal district courts rendering opposite decisions. Under the Pennsylvania ATS decision, the Court refused to issue a preliminary injunction while the Texas court in the Ryan case issued a national ban on the FTC rule, although it previously said the case was limited to the parties before it. I question whether or not the Texas court has the authority to issue an order applicable to third parties beyond those in the case before the court. In the decision, there is no justification for the alleged national coverage of the order, just that the Judge said so. Given the national urgency of this issue and that the FTC rule positively affects millions of employees nationwide, I cannot give the Texas Order the weight the Judge arbitrarily assigns to it, especially in light of a conflicting decision from another federal judge in Pennsylvania.
This is not what our nation requires right now. I argue the FTC rule has not been banned and is effective on September 4, 2024, and employees must push their employers against this issue individually. The enforceability of the FTC rule is undecided. The appellate courts and eventually the Supreme Court must weigh into this very important issue. I would not be surprised if this issue becomes a political football akin to the abortion debate in the current presidential election cycle.
Employees literally can force their employers into court and cause state and federal courts around the country to decide which court, Texas or Pennsylvania, got it right as to whether the FTC has the power substantively regulate noncompete employment agreements nationwide. More importantly, the Texas decision would be merely persuasive legal authority to any court outside the State of Texas, meaning other courts are not required to follow the decision. That is a lot of legal leverage for employees, and they must challenge the Texas court order in their local jurisdictions. Likewise, even if employers took to the offense and began suing employees leaving for competitors after September 4, 2024, there would be a flood of cases to hit the dockets around the country. Overall, it is going to be a mess and there is a lot of room to negotiate and litigate over regarding the applicability of the FTC ban on current and future noncompete agreements.
I say employees and executives can and must challenge their employers in support of the enforcement of the FTC rule banning noncompetition agreements after September 4, 2024. The Texas court decision in Ryan is simply conclusory and holds the FTC cannot make substantive rules about “competition” and further that the FTC rule was arbitrary and capricious. When you read the Pennsylvania decision the opposite is true. The Pennsylvania court got it right and the Texas court did not. They are quite literally two polar opposite decisions, yet the Pennsylvania court decision is firmly grounded in supportive case decisions and Congressional delegation of authority to issue a substantive rule that noncompete agreements are an illegal restraint of trade on the American workforce.
The battle over this issue has just begun and employees should be mad as hell about these one-sided default management agreements that dictate the financial/income affairs of millions of employees across the country. The FTC rule is good for employees and good for this country, just ask Californians in San Jose/Santa Clara (aka Silicon Valley).
If you would like to learn more about this issue and the enforceability of your noncompete agreement, contact Carey & Associates, P.C. at info@capclaw.com or call (203) 255-4150.