It’s no secret that non-compete clauses have been getting a lot of side-eye from courts across the U.S. lately, especially in the healthcare world. Judges are increasingly frowning on these agreements, seeing them as roadblocks to competition, job mobility, and getting patients the care they need.
In healthcare, non-competes are often blamed for limiting the number of doctors available and making it tougher for patients to stick with the providers they know and trust. For these reasons, many states (but not Texas) have restricted the use of non-compete agreements or prohibited them outright.
On April 23, 2024 the U.S. Federal Trade Commission decided to kick things up a notch, voting 3-2 to ban most non-compete clauses in employer-employee contracts. The move was stunning. With one rule, the FTC was attempting to rewrite 50 states’ contract laws, which were crafted by duly-elected legislators and judges over many decades, and relied on by employers to make important business decisions.
[Editor’s Note: Your humble author, having just completed a grueling five-hour continuing education course on Texas’ incredibly nuanced and well-developed corpus of law relating to non-competes was especially agitated by the rule’s publication.]
The FTC’s rule was straightforward. It sought to ban most non-compete clauses. The FTC argued that these agreements tend to keep workers stuck in place and drag down wages. Notably however, the rule didn’t take aim at non-solicitation clauses (unless, of course, they were so broad that they might as well be non-competes).
Legal Drama Ensues
This rule was published in the Federal Register on May 7 and was set to go live on September 4—but as soon as the ink was dry on the FTC’s vote, legal challenges started flying. By July 3, a court slapped a preliminary injunction on the rule. Then on August 20, a trial judge in Dallas struck down the rule in its entirety, finding that the FTC had exceeded the authority delegated to it by Congress. Employers across the country are now breathing a sigh of relief while the FTC is preparing to appeal the court’s ruling.
The court also held that the FTC’s rule was arbitrary and capricious because it was “unreasonably overbroad without a reasonable explanation,” “imposed a one-size-fits-all approach,” and failed to consider the benefits of non-competes or the evidence supporting the need for them.
What’s Next?
If the FTC decides to appeal the ruling, it will likely face resistance at the Fifth Circuit Court of Appeals and the Supreme Court.
In a recent Supreme Court ruling in an unrelated case (Loper Bright Enterprises v. Raimondo), the Court abandoned the so-called “Chevron Deference Doctrine,” which previously encouraged courts to defer to agencies’ interpretations of ambiguous statutes as long as the agency’s interpretation was reasonable. Now, agencies like the FTC have a tougher time proving their rules make sense under the laws they’re supposed to enforce. So, with the Chevron crutch kicked out from under it, the FTC has a very steep hill to climb.
What Does This Mean for Employers?
If somehow the FTC were to prevail, employers would need to inform their current and former employees about any non-compete clauses they have in place. Additionally, they’d have to stop including new non-competes in contracts. However, with all this going on, legal experts are betting that the FTC’s rule will never see the light of day.
Nevertheless, employers must recognize that the tide of public opinion seems to be turning. Legislatures and courts are scrutinizing non-competes more heavily than ever. States like Minnesota, New York, and Indiana have taken steps to ban non-competes in certain instances, and it is always possible that the U.S. Congress could implement a federal ban through legislation.
If nothing else, the FTC’s quixotic rulemaking adventure has brought an unprecedented amount of public attention to the issue and forced employers to imagine a world without restrictive employment covenants. Employers should be mindful of this possibility and prepare accordingly.
Joshua Massingill
Joshua Massingill is an attorney practicing in Austin, Texas. He serves on the Texas State Bar’s Law Practice Management Committee, the Leander Educational Excellence Foundation (LEEF) Board of Directors, and the Success-Werx Board of Advisors. He mentors young entrepreneurs in Leander ISD’s INCubatorEDU program and is active in his church.
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