In April, the Federal Trade Commission announced a new rule that would prohibit nearly all non-compete agreements in the United States. This rule would invalidate nearly 30 million contracts. Non-competes are a controversial topic, as many view them as an unfair business practice.
Unsurprisingly, many business groups brought lawsuits against the new rule prohibiting non-competes. The litigation has already been ongoing for several months.
On July 3, a federal court in Texas put a temporary pause on the law while the matter is more thoroughly litigated. A final ruling should come down sometime in late August.
What is a Non-Compete?
A non-compete agreement is a type of employment contract. It will usually state something to the effect that once the employee leaves the company, he or she cannot work in that same industry for a certain period and within a certain geographical area.
The idea is to prevent customers from leaving the company and following the employee to another business. This is especially so if the employee decides to start his or her own business. The concerns can be particularly pressing when the employee and customer have regular close points of contact.
The customer may view the employee as their provider for that service rather than the company. At least, so the logic goes.
Are Non-Competes Enforceable?
Non-competes are enforceable in Tennessee if they are reasonable. But the courts nonetheless look on non-compete agreements disfavorably. The relevant factors to determine if one is enforceable are the duration, geography, and scope.
A non-compete provision may state that the employee cannot work in the same industry for one year after leaving the company within a 10-mile radius of the company’s headquarters. This is likely an enforceable non-compete.
But if the company says that the employee cannot work at any competing business anywhere in Tennessee for all time, a court would likely rule this unreasonable and invalidate the provision.
There are certain exceptions to this, though. For example, non-compete agreements are generally not allowed in the legal profession. This is because of the Sixth Amendment’s right to counsel, and the fact that non-competes against lawyers would limit one’s choice of counsel.
Why Did the Court Block the FTC’s Rule?
There is some serious doubt about whether the Federal Trade Commission, an executive branch agency, can issue a rule that invalidates nearly 30 million contracts across the country.
A federal judge in the Northern District of Texas found that the FTC likely exceeded its authority in issuing the rule. The court placed a preliminary injunction against the rule while the court hears the matter in more detail.
An important caveat here is that the injunction applies to the parties named in the lawsuit. The court’s decision is not a nationwide injunction against the FTC’s rule. At least, for now.
What’s Next for Non-Competes?
The effective date for the non-compete rule is September 4. The judge stated that a more comprehensive ruling on the agency’s action will come around August 30.
There are multiple lawsuits against the FTC over this rule, in Texas, Pennsylvania, and elsewhere. It is fairly likely that these federal courts will find the new rule to exceed the authority that Congress granted the agency.
If a U.S. district court issues an injunction against the rule, the FTC would likely appeal to the U.S. court of appeals. Depending on how the court of appeals rules, the case could go to the United States Supreme Court within a year or so.
Non-compete agreements are controversial contracts. Many people do not like them, especially for workers in industries like retail and fast food.
Some states have even banned them entirely as a policy decision because of how they restrain commerce. But those states have largely done so by legislative act or through decisions by their highest courts. An executive branch agency banning these contracts nationwide is another story.
Connell Law, PLLC will monitor the progress of these cases and advise our clients accordingly.
