On April 23, 2024, the Federal Trade Commission (FTC) issued its final version of Rules Concerning Unfair Methods of Competition (Rule).  The Rule becomes effective 120 days after being published in the Federal Register.  Almost immediately, two separate lawsuits were filed in Texas seeking to stay enforcement of the Rule and a finding that the FTC exceeded its authority in issuing the Rule.  Why all the fuss?

The Rule, only 9 pages long, is preceded by 560 pages of commentary and justification by the FTC, perhaps foreboding the Rule’s significance and controversy. The Rule bars an employer from entering into or enforcing a non-complete clause with a worker seeking or accepting work in the US or operating a business in the US. The Rule is intended to cover a myriad of non-competes, including covenants not to compete in contracts or employee handbooks, penalties such as liquidated damages assessed against workers who compete with former employers, and forfeiture-for-competition clauses that extinguish employers’ obligations to pay promised compensation or benefits if workers accept jobs with a competitors.

For everyone but ‘senior executives’, the FTC found that non-compete agreements are coercive and unfairly restrict competition. For ‘senior executives’, defined as workers in a policy making positions and receiving annual compensation of at least $151,164, the FTC did not find that non-compete agreements were coercive, but did find they were an unfair method of competition.

The Rule contains a few important exemptions. Non-compete agreements entered into with ‘senior executives’ before the effective date of the Rule are enforceable. The Rule does not apply to persons who have entered into a bona fide sale of a business entity or ownership interest in a business entity or the entity’s assets. And, the Rule does not apply to non-compete agreements if they restrict only work outside the US or starting a business outside the US.

For workers who entered into non-compete agreements now prohibited by the Rule, employers must provide ‘clear and conspicuous’ notice to workers that the clause will not be and cannot legally be enforced.  The Rule provides model language for employers to provide in the notice.

The day after the Rule was issued, Ryan, Inc., a property tax company based in Dallas, Texas, filed suit in United States District Court for the Northern District of Texas seeking to enjoin enforcement of the Rule. Shortly afterwards, the US Chamber of Commerce filed suit in United States District Court for the Eastern District of Texas seeking similar relief.  The Eastern District suspended the Chamber’s lawsuit, finding that Ryan’s was first-filed, vesting jurisdiction over the dispute to the Northern District.

The primary arguments Ryan and the Chamber have forwarded are the very ones the FTC anticipated in the 560 pages of justification preceding the Rule.  Ryan’s primary arguments are that the FTC lacks authority to issue the Rule under the Major Questions doctrine and the Rule exceeds the FTC’s Congressional grant of authority. Notably, the US Supreme Court has in recent years severely restricted the rule making authority of other Federal agencies on the basis of the Major Questions doctrine and lack of clear Congressional authority.  Given the enormous consequences for employers and workers, the enforceability of the Rule is almost destined to be decided by the US Supreme Court.

The attorneys in our Austin and Dallas offices are available to answer any questions you may have about the Rule or other employment issues. Please contact us at info@gstexlaw.com.

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