Texas federal judge finds FTC’s noncompete ban invalid, but limits relief

Judge Ada Brown issued her long-awaited ruling today on the FTC’s noncompete ban in Ryan LLC v. FTC.

In a scathing rebuke of the FTC’s claim of rulemaking authority and the reasoning behind the rule, the court concluded that the FTC’s ban is likely unlawful. However, the court limited its injunctive relief to benefit only the parties before it — not even the members of the U.S. Chamber of Commerce or other plaintiff associations. And the court refused to make its ruling apply nationwide.

The result is that while the court determined that the rule is likely unlawful, the FTC is still free to enforce it (on September 4) against anyone other than the parties in that action.

That may change on August 30 when the court will issue a final decision on the merits. Perhaps at that point, the court will feel it has enough to issue a nationwide order invalidating the noncompete ban.

In the meantime, remember that Judge Hodge will be holding a hearing next week (Wednesday, July 10) on the other motion to stay the effective date of the ban and to enjoin its operation in the other case challenging the FTC’s rule.

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Steps to take now

Unfortunately, the court’s order — while recognizing that the rule is unlawful — creates even more uncertainty for companies and employees. As a consequence, companies can no longer take a wait-and-see approach. For an overview of recommended steps to take, see FTC bans noncompetes: How will you protect your company’s information and keep your customers?

Key at this point is to be thinking about the following:

  • Reviewing and updating agreements and policies to ensure compliance with all of the new state-law developments. This includes, in particular, noncompetes, broad confidentiality agreements, and other agreements in the crosshairs (including no-recruit agreements, nonsolicitation agreements, anti-moonlighting provisions, and training repayment agreements (pejoratively called “TRAPs”)), as well as internal policies that my be treated like impermissible restrictions on employee competition.
  • Reviewing and updating procedures (including the use of data loss prevention software) for protecting trade secrets, other confidential information, and goodwill (see trade secret protection program primer and checklist).
  • Using supplemental agreements and approaches to mitigate the impact of the tightening restrictive covenant laws. For example:
    • Notice provisions (“true” garden leave clauses) may, to the extent enforceable, offer meaningful protection for a short term. Even the FTC’s new Rule acknowledges that these agreements fall outside the scope of the Rule.
    • Springing noncompetes (a court-ordered noncompete as a remedy for a violation of other restrictive covenants or obligations) may create both a deterrence effect and provide a partial remedy for wrongdoing that is discovered early enough. This is a tool created years ago for a client who did not want to use a noncompete, but was worried about the impact of employees violating the other restrictive covenants. It has since been incorporated into Massachusetts noncompete law (MNAA, G.L. c. 149, § 24L(c)).
  • Emphasizing training. Never lose sight of one of the easiest and most effective tools you have is to educate and train employees, especially at onboarding and off-boarding, and with special attention to employees working remotely.

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Firm resources: 

We know how hard it is to keep up with the ever-changing requirements around the country. To help, we have created the following resources (available for free):

We hope you find all of these resources useful. More are coming.

And please note that we are grateful for all of the input we’ve received over the years, and welcome any suggestions for improvements that you may be willing to share.

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*A huge thank you to Erika Hahn for all of her extraordinary help in tracking and monitoring all of the bills around the country and helping me make sure that all of our resources are current and accurate! And, thank you to my friends at other firms for all of the emails and discussions of this crazy ruling.