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Cornered: Out of Court
In Brief: Recent Developments in Noncompete Agreements
There has been a lot of movement around employee noncompete agreements. Jonathan Crook of Fisher & Phillips LLP briefs us on the latest developments.
IICLE® is a 501(c)(3) not-for-profit based in Springfield, Illinois. We produce a wide range of practice guidance for Illinois attorneys and other legal professionals in all areas of law with the generous contributions of time and expertise from volunteer attorneys, judges, and other legal professionals.
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In IICLE's podcast Cornered: Out of Court, we ask attorneys about the questions they get and the responses they give when non-lawyers spring questions on them. These monthly episodes include guest attorneys from different areas of law who help you escape being cornered as you know, staying on top of recent developments is essential to your practice.
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That's why sometimes we break the monthly mold and instead present In Brief.
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There has been a lot of movement around the FTC's noncompete rule. Thankfully, Jonathan Crook is here to brief us on the latest developments.
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My name is Jonathan Crook. I'm a partner at the law firm of Fisher Phillips. I'm located in Raleigh, NC. My practice focuses on restrictive covenants.
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Between employers and employees, which includes noncompete provisions, non-solicitation provisions.
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And any number of other provisions that could be bundled together that protect employers, legitimate business interests, in addition to practicing at Fisher Phillips, I also run a website called Blue Pencil Box, which is a subscription-based knowledge management platform for lawyers and in-house counsel to sort of get the lay of the land in this area of law. And we provide daily updates.
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And checklists and and resources.
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Question One, what's the latest on the Federal Trade Commission's noncompete ban?
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Sure, so the latest is that the FTC's noncompete ban has been set aside for all employers as of August 20th, 2024. And I think it's probably a little bit helpful to set the stage and explain how we got here, right. So earlier this year the FTC published its final rule.
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Planning noncompete agreements and essentially what the final.
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And said was that employers around the country would no longer be able to have noncompete after the effective date of the rule which was scheduled to be today September 4th, 2024. There were some limited carve outs to the ban for senior executives to the extent that we're not compete with senior executives, those could still be enforced.
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But you couldn't enter into do it noncompete agreements with senior executives after the effective bid rather. And the FTC also had a couple of carve outs for noncompetes entered in the sale of a business.
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And the rule would have required employers to send notices to employees other than senior executives by today, September 4th, notifying them that their noncompete would no longer be enforceable going forward. But as you might expect, a lot of people in the business community didn't really like the final rule and so essentially immediately.
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After it was passed a bunch of groups sued the FTC over their authority, or lack thereof, to issue the final rule.
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So after a couple procedural maneuvers, there were essentially 3 main lawsuits, one in Texas, one in Pennsylvania, and one in Florida. The Texas judge was the court to first rule on these issues and entered a preliminary injunction temporarily and join the FTC from enforcing the rule, and the US Chamber of Commerce.
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Was one of the main intervenor plaintiffs.
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In that case, but the issue with that ruling is that it only enjoined the FTC's rule from affecting just the parties in that case. So there are 5 entities in the case, and you know, the US chamber said we'd like for you to stop this rule from applying to all of our Members. But the court said no, right. So they the sort of first attack.
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Wasn't a complete failure, but it also wasn't a complete success.
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Another company filed suit in Pennsylvania, challenging the role, but in that case, the court actually sided with the FTC. The court held that the FTC had the authority to issue the rule, and the rule wasn't arbitrary and capricious or otherwise unconstitutional. So it denied that company's motion for a preliminary injunction. So at that point, employers are kind of looking around like, OK.
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We've got these split decisions. Do we need to start getting ready for September 4th? And then finally, there was a third ruling in Florida just a few weeks ago. And that judge also enjoined the FCC's rule from applying, but again, just has to that single company that filed suit.
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Florida. So as of a few weeks ago, employers were still sort of staring down the barrel of this September 4th day, but then finally on August 20th, the Texas Court entered its final decision on the merits in that case. And it concluded that the FTC lacked the statutory authority to issue the final rule, and it also.
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Ruled that the FCC's noncompete ban.
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Was arbitrary and
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the remedy, according to the court, was that it had, to quote, set aside the rule under the Administrative Procedure Act, which basically means that the rule doesn't apply to any employers anymore. Until and unless that decision gets overturned. So far, the FTC has not appealed that decision, but we've been monitoring the docket.
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And in some public statements, the FTC has hinted that it might appeal that decision. Meanwhile, the other two cases are still.
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OK. The one in Florida and the one in Pennsylvania, I think the war is not completely over yet, but employers around the country could definitely breathe a sigh of relief that at least they don't need to comply with the rule as of the original effective.
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Date.
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Question #2 what is the latest on the National Labor Relations Board's focus on the noncompete agreement?
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This is the other main avenue through which the federal agencies have been going after noncompete agreements. Shortly after the FTC publicly announced the proposed rule in January of 2023, a few months later.
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The NLRB's general counsel issued a memo basically taking the position that most noncompetes would interfere with employees rights under Section 7 of the National Labor Relations Act. This is a novel theory. There really haven't been any board decisions or cases that reached this conclusion.
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But the General Counsel's memo goes on to explain that, you know, essentially, if a covered employee has a noncompete agreement, it might interfere with their ability to, for example, demand better working conditions by threatening
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to resign, with the idea being if you can't go to work for a competitor in your hometown or whatever, the geographic scope is, you're going to be less likely to threaten to quit unless your employer improves working conditions. Again, this when this memo came out, it made a lot of shock waves because again, it's a a very novel theory.
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But we do know that the NLRB has been pursuing these types of claims they've entered into.
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If your settlement agreements with employers in which they required employers to rescind certain restrictive covenants, there have been a couple of memoranda issued by the division of advice that sort of parsed other types of restrictive covenants that are often bundled in with noncompete agreements. So for example.
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The division of advice opined that a customer non solicitation provision as distinguished from a noncompete of the type that was described in the general counsel's memory.
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Them actually did not interfere with Section 7 rights because those types of provisions don't really implicate the employees right to self organize or to engage in protected concerted activity. The most recent update is that an administrative law judge concluded that.
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A noncompete agreement and an employee non solicitation provision did violate the employees Section 7 rights under the NFL rights. So that was that was the first ruling that we'd seen.
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After the General counsel's memorandum. But of course the board itself has not issued a ruling yet on this issue, and so far I'm not aware of any court decisions that look at this either. So this is definitely something that employers should be keeping an eye on and it certainly could take more of a center.
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Stage now that the FTC is not complete, ban has been set aside, at least for.
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Now, but it certainly seems like the general counsel and other prosecutors in the NLRB are going to be pursuing this theory and until and unless the board sort of rejects the legal basis for the theory report does, then it's something that employers need to be aware of.
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Lastly, what should employers be doing with their restrictive covenants now?
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The FTC's
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noncompete ban being set aside was,
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you know, good
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for the employers that use noncompetes in order to protect their business interests, but what that means is that employers are left with the.
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The incredibly complex patchwork of state laws that govern these agreements, and So what employers need to do now, particularly employers who have workers in multiple states, is make sure that their agreements are compliant with all of these various state level administrative and procedural requirements. So just for example.
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Depending on what states the employer may be operating, there could be advanced notice requirements that require the employer to give a copy of the agreement a certain number of days before the candidate is hired. There could be minimal compensation requirements that require that the person make above a certain.
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In order for them to have an enforceable, noncompete, there could be signature requirements. Some states require that the employer notify the employee of the right to consult with counsel before they sign the agreement, and then on top of these administrative requirements, there could also be statutory restrictions on, for example, what type of behavioral prohibition
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Is allowed and the noncompete. Does it have to be limited to just the types of duties that the employee performed for their previous employer? What can?
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It be brought in that.
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Their statutory caps in some states on how long the noncompete can be right. Is it a year after the employment ends? Is it 18 months? Is it 2 years? There's also certain statutory presumptions that might come into play and at the same time the same principles apply to the geographic scope. There could be either statutory limitations or presumptions of reasonableness.
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That's the geographic scope and in some states you have to actually list specific counties or parishes. Louisiana is famous.
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For that rule, so on top.
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Of all of the very, very specific, and sometimes contradictory statutes that govern noncompete agreements, general.
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Really, you may also have industry specific rules and regulations that you need to be aware of. A number of states in this calendar year have passed new statutes that regulate noncompetes for healthcare practitioners, for example. So if you, if you're an employer of healthcare practitioners, there could be even more specific regulations that you need to be aware of.
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And probably the biggest issue that employers need to be watching out for are states that not only render noncompetes that violate the law, void and unenforceable, but there are some states out there that impose civil penalties for using agreements that don't comply with.
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The law. So if you're an employer and you're handing out 100 agreements in a state that imposes civil penalties, you could be facing some real liability in that situation and not just, you know, the failure of your agreement to be enforceable, even though the the FTC noncompete, ban has been set aside. It's certainly not a green light.
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For employers to use noncompetes indiscriminate.
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They still need to be very thoughtful about how and when they use these agreements and they need to be thoughtful about complying with the state regulations, both to reduce their exposure and also increase the likelihood that their provisions are actually going to be enforceable, which can then protect their legitimate business interest which.
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Again, that's the whole point.
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Thank you, Jonathan. Jonathan Crook is Partner at Fisher Phillips in Raleigh, NC.
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