“Please Tell Me you Didn’t. . . How to Keep Clients Out of the Jailhouse, Poorhouse and Lawyers Out of the Nuthouse” -Blog
The FTC issued a nearly-complete ban on non-compete agreements which would have taken effect 120 days after the new rule had been published in the Federal Register, or on September 4, 2024. A Texas Court has now enjoined the rule, but only as to the parties in the case. So, where are we now?
First, for those of you needing context, or just like keeping score of “who just punched whom”, the Biden Administration is “Blue.” Blue politicians and states are more Labor and regulatory friendly. (See, Exhibit “A”: California).
In California, employers can get into trouble and fined $2500 for each unfair competition violation, including either asking an employee to sign a non-compete, or failing to tell an employee with an unenforceable non-compete that the agreement isn’t worth the paper it is written on.
Texas is “Red,” which is pro-business. You might say that Texas prides itself on “beating the pants off” California, when it comes to encouraging businesses to move from Blue states to the Lone Star State.
One way Texas does this is found in Texas Bus. & Com. Code 15.50, which allows non-competes which are reasonable in time, scope and geographic limits.
But, complicating matters, is the fact that Texas has pockets of Blue cities, Dallas, Houston, Austin, San Antonio (basically, any large city in America tends to be Blue, while the countryside is Red), and Texas state court judges in big cities are more likely to find that the “reasonableness” element of non-compete contracts, are not, well, “reasonable.”
In sum, it is a mess, even in states that allow non-competes.
The Biden FTC rule was intended to make the rest of the country more like California than Texas. And in Texas, “them’s fightin’ words.”
Not surprisingly, then, Ryan LLC, the world’s largest business tax firm, headquartered in Dallas (if you’ve ever ridden by the Dallas Galleria Mall, you can’t miss the building) filed suit in Texas federal court to seek an injunction against the enforcement of the FTC ban.
According to a July 16, 2024 blog I found on Westlaw:
On July 3, 2024, a federal court in Texas issued an order that partially enjoins the Federal Trade Commission (“FTC”) from implementing or enforcing its Final Rule prohibiting most non-compete agreements (the “Final Rule”), marking the latest development to the FTC’s issuance of the Final Rule.
The July 3rd order was issued in the case of Ryan, LLC v. Federal Trade Commission , (“Ryan, LLC”) in which the plaintiff, Ryan, LLC , a tax firm, brought suit against the FTC with the backing of the U.S. Chamber of Commerce, and others, including two Texas trade associations. The Court’s order, issued just two months before the Final Rule was set to take effect on September 4, 2024, comes with two significant caveats:
First, it is applicable only to the plaintiffs in the Ryan, LLC litigation, as the Court declined to impose a nationwide injunction without further briefing from the parties as to why such nationwide injunctive relief would be necessary to the plaintiffs at a preliminary stage. Second, the order left open the possibility of a nationwide injunction as the Court signaled an intent to rule on the merits of the case on or before August 30, 2024. Yet as written, the order leaves the Final Rule intact for all other employers beyond those named as plaintiffs in the pending action.
The Texas Court held that the plaintiffs were likely to prevail on the merits of their claims. It reasoned that Section 6(g) of the FTC Act does not grant the FTC the authority for “substantive rulemaking,” such as the Final Rule, but rather limits it to issuing “housekeeping rules” necessary to prevent unfair competition. As a result, the Court concluded that the FTC lacked the authority to issue the Final Rule in the first place. The Court further criticized the FTC for adopting a “one-size-fits-all approach with no end date,” without adequately considering alternative, less restrictive measures and reasoned the Final Rule is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” As such, the Court found that Ryan, LLC and the other plaintiffs in the case had shown a likelihood of success on the merits.
Then again, if Trump gets elected, the first thing he will likely do, is undo anything the Biden administration did, so this might all be a moot point anyway.