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FLSA Issues Minimum Salary Threshold for Employees Classified as Exempt.
Nationwide Injunction Blocks FTC's Noncompete Ban, Delaying Implementation
On August 20, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas issued a nationwide injunction that halts the Federal Trade Commission's (FTC) rule banning most noncompete agreements across the United States. This decision postpones the rule's scheduled September 4, 2024, implementation date, leaving businesses in a state of uncertainty as they await further legal developments.
Overview of the FTC's Noncompete Rule
The FTC's rule, which represents a significant shift in employment regulation, was designed to foster fair competition and enhance worker mobility by prohibiting employers from restricting employees' ability to work for competitors or start their own businesses after leaving a job. The rule would ban the enforcement of noncompetes for the vast majority of workers, with exceptions for senior executives earning more than $151,164 annually and holding policy-making positions.
Employers who have previously entered into noncompete agreements with workers would be required to inform those workers in writing—via mail, email, or text message—that the provisions are unenforceable. This notice must also identify the person who originally entered into the noncompete.
Legal Challenges and Judge Brown's Ruling
The legal challenge that led to the injunction was brought by Ryan LLC, a tax services and software provider, with support from several business groups led by the U.S. Chamber of Commerce. The plaintiffs argued that the FTC overstepped its authority by issuing the noncompete ban, and that any statutory authority the FTC might have to adopt the ban is an unconstitutional delegation of legislative power.
Judge Brown initially issued a preliminary injunction in July 2024, which applied only to the plaintiffs in the case. However, at the summary judgment stage, she expanded the scope of her ruling to apply nationwide. Judge Brown concluded that the FTC exceeded its statutory authority because Congress granted the agency the power to enact only procedural rules concerning unfair methods of competition, not substantive rules. Additionally, she found the rule to be arbitrary and capricious due to its broad application to nearly all noncompete clauses.
Implications for Employers
While the nationwide injunction delays the rule's enforcement, businesses should remain vigilant in protecting against the misappropriation of trade secrets and proprietary information. Even with the ban on noncompetes, non-disclosure agreements (NDAs) and non-solicitation agreements (Non-Solicits) remain viable tools for safeguarding confidential information. The FTC has emphasized that these agreements, when appropriately tailored, do not function as noncompetes and are less restrictive alternatives.
However, the FTC's rule introduces a "functional test" to determine whether an agreement, even if labeled as an NDA or Non-Solicit, effectively operates as a noncompete. This test could lead to further litigation as companies and workers navigate the nuances of restrictive covenants under the new regulations.
Future Legal Developments
Other lawsuits challenging the rule remain pending, with conflicting rulings emerging from different courts. For instance, in *ATS Tree Services, LLC v. FTC*, Judge Kelley B. Hodge of the U.S. District Court for the Eastern District of Pennsylvania declined to grant a preliminary injunction, finding that the plaintiff was unlikely to succeed on the merits. Meanwhile, in *Properties of the Villages, Inc. v. FTC*, a judge in the U.S. District Court for the Middle District of Florida granted a preliminary injunction, though it applied only to the plaintiff in that case.
Given these conflicting decisions, the validity of the FTC's rule will likely be resolved at the appellate level, with appeals expected well after September 4. For now, businesses can pause their compliance efforts while awaiting further developments.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Works Cited
Dudley, Nathaniel. "The FTC’s Final Rule Banning Non-Compete Agreements Takes Effect on September 4, 2024: What It Means for Employers." *CMBG3 Law*, 19 Aug. 2024, www.cmbg3.com/legal-resource.
Elledge, Brandon H. "Don't Fret (Yet): Trade Secrets, NDAs and Non-Solicits After the FTC Non-Compete Rule." *Holland & Knight*, 29 Apr. 2024, www.hklaw.com/en/insights/publications/2024/04/dont-fret-yet-trade-secrets-ndas-and-non-solicits-after-the-ftc-non-compete-rule.
Federal Trade Commission. "FTC Announces Rule Banning Noncompetes." *Federal Trade Commission*, 23 Apr. 2024, www.ftc.gov/news-events/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.
Cohen & Gresser. "A Texas Court Strikes Down The FTC's Non-Compete Rule: What's Next?" *Cohen & Gresser*, 27 Aug. 2024, www.cohengresser.com.