Tag: noncompete ban

It’s a Cruel Summer (for Employers Still Facing Uncertainty of Looming Federal Trade Commission Noncompete Rule)

Summer 2024 may be remembered for its uncertainty. On top of the surprises in political campaigns and the Supreme Court’s overruling of decades-old precedents, employers nationwide still face uncertainty with the FTC’s looming rule banning the vast majority of employee noncompetes across the United States. This uncertainty was underscored on Tuesday, July 23, 2024, when a federal judge in Pennsylvania declined to enjoin the FTC’s Noncompete Rule (the “Rule”) from taking effect September 4, 2024.

What will happen in September remains unclear, as the nation still awaits a final ruling next month from U.S. District Judge Ada Brown of the Northern District of Texas. On July 3, 2024, Judge Brown temporarily enjoined the Rule, but only for the named plaintiffs — not nationwide.

One thing is certain: Without a nationwide vacatur of the Rule or an injunction against its enforcement, employers will face further uncertainty.

Back in the Northern District of Texas, Plaintiff Ryan LLC and Intervenor U.S. Chamber of Commerce filed briefs this week requesting that Judge Brown’s injunction against the Rule be expanded nationwide. They argued that expanding the injunction nationally would “spare tens of thousands of American businesses the illegal burdens imposed by the rule,” promptly conclude litigation, and avoid “a torrent of lawsuits.”

The FTC’s responsive brief in Texas is expected late next week, with a final ruling from Judge Brown expected on or before August 30, 2024.

What Should Employers Be Doing Now?

Our advice from the July 5, 2024, article remains relevant — for now. We will continue monitoring developments in the courts and providing updates on best practices.

  • Get ready to distribute the required notices informing employees that their noncompetes will no longer be enforced. The Noncompete Rule requires notifying current and former employees that their noncompete agreements will not be — and cannot be — enforced going forward, with notice being provided at the employees’ last known street address, email address, or phone number. For large employers, this could be a significant undertaking to prepare. Since no courts have stopped the FTC rule from taking effect on a nationwide basis, it would be prudent for employers to start gathering all the information they would need to comply with the notice requirement. That said, employers should still wait until after further action is taken by the courts, or in another one of the cases challenging the Rule, before sending the notices.
  • Businesses should explore whether they might have other ways to accomplish some of the same goals as noncompetes, such as nondisclosure agreements or fixed-duration employment contracts.
  • Businesses should review their other restrictive covenants, including non-solicitation and no-hire clauses, to ensure those clauses are narrowly tailored to protect their legitimate interests, thereby reducing the risk that they will be challenged as being within the Rule’s catchall provision prohibiting terms that “function[ ] to prevent” a worker from working for a different company after employment.
  • Businesses should have confidentiality agreements in place with employees and should prepare for a potential wave of trade secret litigation as employees are increasingly enticed to leave their employment to work for competitors. This means businesses will need to be prepared for increased costs of data and forensic work that are generally prevalent in trade secret and confidentiality litigation matters.
  • It may be time for businesses potentially impacted by the Rule to substantively review their existing agreements and policies as described in the points above and get started on drafting replacement forms of agreements that will comply with the Rule — if it goes into effect.
© 2024 Foley & Lardner LLP
For more news on the Looming Federal Trade Commission Noncompete Rule, visit the NLR Antitrust Trade Regulation and Labor Employment sections.

Pennsylvania Federal Court Declines to Preliminarily Enjoin FTC Rule Banning Non-Competes

Earlier today (July 23, 2024), Judge Hodge in the U.S. District Court for the Eastern District of Pennsylvania denied a tree care company’s motion to stay the effective date and preliminarily enjoin the Federal Trade Commission’s (“FTC”) proposed final rule (“Final Rule”) banning nearly all non-competes. ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743-KBH (E.D. Pa.). The decision comes in the wake of the U.S. District Court for the Northern District of Texas’ July 3, 2024 ruling to the contrary in Ryan LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, which stayed the Final Rule’s effective date as to the plaintiffs in that case, but had no nationwide effect.

The Pennsylvania Court’s Decision

The Pennsylvania court denied Plaintiff ATS Tree Services, LLC’s (“ATS”) request for a preliminary injunction based on its conclusion that the company failed to establish that it (i) would suffer irreparable harm if injunctive relief was not issued; and had a reasonable likelihood of succeeding on the merits of its claims.

ATS argued it would be harmed by incurring “nonrecoverable efforts to comply” with the Rule, and by losing “the contractual benefits from its existing non-compete agreements.” ATS described its nonrecoverable compliance costs as: costs associated with notifying its twelve employees of the change in accordance with the Rule’s notice provision; the costs and efforts to “review and modify [its] business strategy”; and the unquantifiable costs and efforts of altering its specialized training program. But court found these either insufficient or too speculative to support injunctive relief. ATS further argued it would face the risk that its employees would leave and transfer confidential information to direct competitors. The court found these risks too speculative.

ATS also unsuccessfully argued that it would succeed on the merits because, it asserted, the FTC lacks substantive rulemaking authority under its enabling statute, the FTC exceeded its authority, and Congress unconstitutionally delegated legislative power to the FTC. The court rejected each argument. The court further found that the “major questions doctrine” did not apply, because the Final Rule falls within the FTC’s core mandate, and the FTC has previously used its Section 6(g) rulemaking power in similar ways to the Final Rule.

Looking Forward

The Pennsylvania court’s decision did not analyze the Ryan decision, which reached contrary conclusions. It is likely that the dispute will ascend to the Third and Fifth Circuits, respectively. Notably, the Ryan court has indicated that it intends to issue a final judgment on the merits by August 30, 2024, which is likely to be appealed, and the Final Rule is scheduled to become effective by September 4, 2024.

© 2024 Proskauer Rose LLP.
For more news on the Eastern District of Pennsylvania’s decision in ATS Tree Services, LLC v. Federal Trade Commission, visit the NLR Antitrust Trade Regulation section.

What the FTC’s Rule Banning Non-Competes Means for Healthcare

The FTC unveiled its long-awaited final rule banning most non-compete agreements during a live broadcast of a Commission meeting on April 23, 2024. The proposed rule, which was first announced in January 2023, underwent an extensive public comment process in which approximately 26,000 comments were received. According to the FTC, approximately 25,000 of these comments supported a total ban on non-competes. While there was some expectation that the final rule would be less aggressive than the proposed rule, that turned out not to be the case. By late summer 2024, most employers, except for non-profit organizations, will not be able to enforce or obtain non-competes in the U.S. except in extremely narrow circumstances. The new rule will take effect 120 days after it is published in the Federal Register. Assuming the rule is published this week, we can expect it to take effect by late August. That is, of course, if a court does not enjoin the rule first. Shortly after the rule was announced on April 23, the U.S. Chamber of Commerce stated its intention to sue the FTC. U.S. Chamber to Sue FTC Over Unlawful Power Grab on Noncompete Agreements Ban | U.S. Chamber of Commerce (uschamber.com) The first lawsuit challenging the new rule was filed on April 23, Ryan, LLC v. Federal Trade Commission, Case No. 3:24cv986 (N.D. Tex. Apr. 23, 2024). Among other relief, the Ryan suit seeks to have the rule vacated and set aside. There are significant legal questions concerning whether the FTC has the authority to take this action by rulemaking or whether this is best left to the legislative process. While some U.S. states have banned non-competes, many U.S. states have not banned them.

As written, the rule will have profound effects on virtually every industry, especially health care, where non-competes are common in physician and mid-level practitioner employment agreements. As several Commissioners indicated during the April 23 meeting, they are particularly concerned about non-competes in health care and believe this rule will save approximately $74-194 billion in reduced spending on physician services over the next decade.

Following is Nelson Mullins’ quick take on what health care employers need to know:

  1. The rule does not apply to non-profits. The basis for the rule making is Section 5 of the FTC Act, which doesn’t apply to non-profits. So, a non-profit health system that has non-competes with physicians or other workers is not impacted by the rule. Be aware, though, that the FTC may be looking to test whether some non-profit health systems are really operating as true non-profits. Tax exempt status alone will not be enough. We believe, however, that given significant and quantifiable charitable benefits that most non-profit systems provide, the FTC may be hard pressed to find a good test case within the non-profit health care industry.
  2. For all others, the rule bans all non-compete agreements for any worker, regardless of title, job function, or compensation, after the effective date. Thus, a for-profit health system or for-profit physician practice that uses non-competes will be significantly limited. The only non-competes that will be allowed to remain in force are non-competes for “Senior Executives” that were entered into before the rule becomes effective.
  3. The rule will take effect 120 days after it is published in the Federal Register. This will likely occur this week, so we expect the effective date to be approximately August 20, 2024.
  4. The rule rescinds existing non-competes for all workers who are not “Senior Executives.”
  5. “Senior Executive” is a narrowly-defined term meaning:
    1. a person in a policy making position; and
    2. who was paid at least $151,164 in the prior year.
  6. Existing non-competes for Senior Executives are not rescinded. New non-competes with Senior Executives entered into prior to the effective date are still allowed. However, no new non-competes with Senior Executives may be entered into after the effective date.
  7. “Policy-making position” means: President, CEO, or equivalent, or other person who has policy making authority, i.e., decisions that control a significant aspect of a business entity. Most clinicians will not meet the definition of “Senior Executive.”
  8. Non-senior executives who are now under a non-compete must be given notice by the effective date that their non-compete will not be, and cannot legally be, enforced. Model language for the notice is in the rule.
Copyright ©2024 Nelson Mullins Riley & Scarborough LLP
by: Denise M. Gunter, Carrie A. Hanger, Candace S. Friel of Nelson Mullins
For more news on the Implications of the FTC Noncompete Ban on Healthcare, visit the NLR Health Law & Managed Care section.