What does Texas federal court overturn of FTC ban on non-competes mean for employers and employees?

August 27, 2024

Employees at all levels have significant access to sensitive data in this digital working age

Non-compete agreements between employer and employee were all but banned effective Sept. 4 under a new Federal Trade Commission rule – until a federal court in Texas last week ruled otherwise.

The U.S. District Court for the Northern District of Texas Aug. 20 held that the FTC rule was overbroad and arbitrary and that it did not have the authority to promulgate substantive rules regarding unfair competition.

“As a result, employers no longer have to send notices to individuals previously under a non-compete to advise them that the provision, or agreement, is unenforceable,” said Rania V. Sedhom, managing partner of Sedhom Law Group, New York.

Employers can now follow the law in place prior to the FTC ban. That is – except in jurisdictions such as California, Minnesota, Oklahoma and North Dakota, where non-competes are prohibited – employers may enforce reasonable non-compete provisions and agreements.

Unless the FTC appeals, its rule will not go into effect Sept. 4.

Employers should ensure that their noncompete provisions and agreements are reasonable and adhere to the applicable state laws, per Ms. Sedhom.

Rania V. Sedhom

In this interview, Ms. Sedhom outlines the implications of the Texas ruling, the FTC’s rationale for the ban on non-competes, how organizations have used non-competes in the past and how employers should be vigilant about their IP assets and databases.

Please read on:

What implication will the Texas ruling on overturning the FTC ban on noncompete agreements have on luxury brands and retailers?
Enforcement of the ban is on hold and luxury brands and retailers no longer have to communicate to those under a restriction that the provision is unenforceable.

However, companies must still adhere to state laws.

Therefore, I advise that companies review the state rules to ensure that their non-compete agreements are reasonable.

Each state, and sometimes city or municipality, applies differently, especially as it relates to geographical restrictions.

What was the rationale for the FTC ban on non-competes?
The FTC did not want individuals to be burdened by non-compete agreements and wanted to instead create unfettered opportunities for employment, with limited exceptions.

How many states ban non-compete agreements?
There are four states that ban non-compete agreements and provisions: California, Minnesota, North Dakota and Oklahoma.

How have brands and retailers used non-competes in the past to protect themselves?
Competition in the fashion industry and amongst retailers is very high.

When a brand hires a creative director or designer, the look and feel of the brand can change.

Brands want to protect themselves by safeguarding their unique look and feel by forcing certain individuals to take a break from employment or managing where they can practice their craft.

With the ban off the table, will this be good news for employers?
Yes. Reasonable employment restrictions are just that – reasonable.

In many instances, especially when the non-compete disallows employment altogether – for example, garden leave – the time away from work is paid.

That said, it’ll be bad news for employees, right?
That is uncertain.

A restrictive covenant cannot ban you from working in an entire industry, unless it is a new industry and the individual is currently working for the market maker.

It may hinder their growth or mobility, especially in a tech-driven world?
I don’t think so.

There is plenty of opportunity for talented tech employees to help create or modify proprietary systems of other companies.

Moreover, the tech employee was hired to effectuate the idea or dream of the founder.

Protecting that idea is crucial for various reasons, including the ability to get investors and continue paying the tech employee.

Do you think the FTC will appeal the Texas District Court’s ruling?
Many of my cohorts believe an appeal is imminent. However, I disagree.

I think that with the robust measures many states are taking to try to ban non-competes locally, this matter will be left to the states. But time will tell.

How should marketers and retailers ensure the integrity and safety of their IP and database assets when many employees have access to the same information, especially working from home where there is less monitoring?
Employers must be vigilant in monitoring and should limit the sharing of information.

There are SAAS programs that prevent users from forwarding and downloading information. Employers need to employ safeguards.

Interestingly, California has long been the center of tech, industrial and agro innovation and the state has lived without non-competes for a while. So, it is possible for marketers to live in an environment without non-competes.
According to Goodwin Recruiting, California is not where tech job growth will focus.

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