Join the U.S. Chamber of Commerce to benefit from a final ruling invalidating the FTC’s noncompete ban (maybe)

If your company is not a member of the U.S. Chamber of Commerce yet, you may want to join immediately.

As I noted when it happened on July 3, and has been all over the news since, the judge (Judge Ada Brown) in the Ryan LLC v. FTC case issued a scathing rebuke of the FTC’s noncompete ban, ruling that the ban is likely unlawful. However, the court limited its injunctive relief to benefit only the parties before it.

Although the U.S. Chamber of Commerce and other associations are parties, the court declined to extend the preliminary injunction order to benefit the members of the U.S. Chamber of Commerce or other plaintiff associations. As the court explained, because “Plaintiff-Intervenors have not briefed associational standing [and] have directed the Court to neither sufficient evidence of their respective associational member(s) for which they seek standing, nor any of the three elements that must be met regarding associational standing, . . . the Court declines to extend injunctive relief to members of Plaintiff-Intervenors.”

The uncertainty that this type of ruling creates is obviously enormous. Yet, the approach is consistent with a decision just five days earlier by United States District Court for the Eastern District of Texas to grant “a preliminary injunction to block the DOL’s new rule raising the salary thresholds for the white-collar exemptions” but limiting the order to “enjoining enforcement of the rule against [only] the state of Texas as an employer.” Although the ruling similarly found the DOL’s rule to be invalid, it too left virtually every company affected by the rule in a quandary about whether they must comply with an invalid rule.

Next steps in the case

Fortunately for the members of the party associations, the court in Ryan, LLC v. FTC provided a roadmap for the associations to address the issue and potentially bring their members within the ambit of the final decision: The Plaintiff-Intervenors (i.e., the U.S. Chamber of Commerce and other party-associations) need to brief the issue and identify their members.

As to the ability of the associations to represent their members, the court explained that the associations will need to demonstrate “(1) the association[s’] members would independently meet the Article III standing requirements; (2) the interests the association[s] seek[ ] to protect are germane to the purpose of the organization[s]; and (3) neither the claim asserted nor the relief requested requires participation of individual members.” (Citations omitted).

As to identification of the associations’ members, that’s the tricky part, as many of the members may prefer anonymity. But, even if the names could be filed under seal, it is unclear how the FTC could be limited in its enforcement against those companies without the names being publicly disclosed.

From a timing standpoint, according to the court’s ruling, by July 9 (that’s just three days from now), the parties must file a joint status report, which the court expects “to include deadlines for: (i) the FTC’s deadlines to file responsive pleadings; (ii) the Parties amended pleading(s) deadlines, if any; (iii) further filing(s) of the administrative record; and (iv) the Parties’ respective briefing on the merits.”

So expect lots of activity in the case leading up to the court’s August 30 final decision on the merits.

One of the key questions about the court’s final decision is whether it will remain limited to the parties before it or if it will be broadened to preclude the FTC from enforcing the rule against anyone, given that the rule is unlawful. If it remains limited to the parties, the question will then be whether the decision will protect the associations’ membership.

You can expect those issues to be fully briefed before August 30.

Up the odds of benefiting from the order

But that means that, in the meantime, there may be an opportunity for companies to increase the odds that they will benefit from the final decision.

If the association’s representative capacity is briefed (which it no doubt will be) and accepted by the court (time will tell), the (presumably identified) members will benefit from an order.

But as they say, “you’ve got to be in it to win it.”

If your company is not a member of one of the party associations by some point in time (it’s unclear what that point is, though it likely has not yet passed), it will not receive the benefits of the order (unless the order is broader than just the parties and their members).

So, if your company wants to increase the odds that it will benefit from the order, it should join the U.S. Chamber of Commerce or one of the other associations.

Steps to take now to protect your company

Stay tuned for the status report.

Who knows, maybe the FTC will recognize the nationwide dilemma facing companies — of all sizes — as a result of the rule’s uncertain future and voluntarily postpone the rule’s effective date to mitigate the adverse impacts resulting from the uncertainty, as urged by over 200 chambers of commerce and various other groups.

Don’t count on it!

Instead, as I have been urging for a long time — in light of the trends in state restrictive covenant legislation, increasing judicial scrutiny in many courts, and the uncertainty of federal regulation — companies really need to take the steps necessary to protect their information and retain their customers, including:

  • 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 Nicole Daly for pointing out the other recent decision in the North District of Texas refusing nationwide application of its ruling on the DOL thresholds.