Dallas Judge Stalls Rollout of Employee Non-compete Ban
A CLIENT ALERT by Tripp Scott's Paul Lopez and Jake Blumstein
This week’s ruling by U.S. District Judge Ada Brown in Dallas addressed the Federal Trade Commission’s (FTC’s) alleged overreach in propagating a nationwide rule severely limiting the applicability of existing employee non-compete agreements and effectively barring new ones.
In sum, it barred a rule from taking effect that would ban employers from requiring their workers to sign non-compete agreements. In other words, companies can continue to use non-compete covenants with employees.
The FTC had justified its ban on non-competes as falling under its authority to regulate “unfair method(s) of competition” under Section 5 of the Federal Trade Commission Act, maintaining that non-competes “hurt workers” and “harm competition” in that they arguably “keep wages low, suppress new ideas, and rob the American economy of dynamism.“
Judge Brown, however, completely disagreed with the FTC and granted an employer’s motion for summary judgment. In doing so, the court held the FTC lacked substantive rule-making power. The provision the agency leaned on, in a separate section of the Act, authorized only “housekeeping” regulations to establish procedures for its actual power to adjudicate cases of anticompetitive behavior. That conclusion was strengthened by FTC’s own history, specific grants of Congressional rule-making authority in other areas (consumer protection) and the Act’s lack of regulatory enforcement procedures.
KEY TAKEAWAYS
Employers with non-competes in employment agreements are permitted to continue enforcing their non-competes for existing employees, and may disseminate non-competes for newly hired employee so long as they are reasonable in time and scope;
Because of new public policy arguments which may be asserted by employees in non-compete litigation, employers should ensure their other restrictive covenants, such as non-solicit covenants and non-disclosure agreements, are properly drafted; and
The FTC will likely appeal the U.S. district court’s ruling to the Fifth Circuit, where the non-compete ban is expected to face a hostile reception. It now appears doubtful that the non-compete rule will ever become effective in its current form, but it will probably be years before the issue is finally resolved.
