Earlier this year, the Federal Trade Commission (FTC) published their ruling banning non-compete clauses in all employment agreements nationwide. The rule was scheduled to take effect on September 4, 2024; however, after many legal challenges, the rule was found to be unconstitutional, arbitrary and capricious. As a result, non-compete clauses are still very much enforceable across the United States.
So, the big question is, what happens now? This article will walk you through the recent rulings, what they mean for healthcare providers, and what you should be aware of moving forward.
Legal Challenges to the FTC’s Non-Compete Ruling
After the FTC’s ruling was released, multiple lawsuits were filed in federal court across the country. The core issue of these suits was not discussing the concept of the non-compete clause, but whether the FTC had the authority to impose such a sweeping ban across the United States. The plaintiffs who filed lawsuits in Federal Courts argued that the FTC’s actions were unconstitutional, arbitrary, and beyond its legal powers. It was the U.S. District Court for the Norther District of Texas in the case of Ryan LLC v. Federal Trade Commission who held that the FTC exceeded its authority and that the ruling was arbitrary and capricious. The Ryan court relied on the recent Supreme Court case of Loper Bright Enterprises v. Raimondo in order to find against the FTC. As a result of Loper, the FTC may have a difficult time in appealing this matter to a higher court.
The Findings of the Loper Case
In July 2024, the Supreme Court ruled that federal judges could now interpret any ambiguity in any federal agency act as they saw fit, instead of deferring it back to the federal agency. Forty years before the Loper ruling, the Supreme Court ruled that the federal agencies had the right to interpret any ambiguity in their acts and all federal judges had to defer to the agencies interpretation when a case was brought in front of them. The case was Chevron v. Natural Resources Defense Council and the ruling became known as the “Chevron Deference”. This law was in place for decades, without any issues. However, as a result of Loper, the Chevron Deference is no longer valid and federal judges are free to interpret any federal agency act as they wish. As a result, the Ryan Court interpreted the FTC’s act as not permitting them to have a national ban and thus, the FTC ruling was unconstitutional. If not for the Loper decision, it is unclear whether the ban would have been permitted to pass.
What Does This Mean for Non-competes Now?
So, where does this leave non-competes in employment agreements? Here’s what you need to know:
- In States like New York, New Jersey, and Connecticut: Non-competes remain enforceable, as long as they are reasonable in both scope and duration. These clauses prevent an employee from working in a specific geographical area for a specific period of time after the termination of employment. Based on the State Courts, the test is whether there is a legitimate business interest to have the non-compete, whether it is reasonable in scope and the employee must be able to earn a living after termination. If all of these conditions are met, the Courts will enforce the non-compete as written in the agreements.
- In States like California, Illinois, Massachusetts, and Washington, D.C.: Non-competes in these states are either outright banned entirely or they are heavily restricted. If you practice in these states, it is essential to consult with an attorney who understands the local laws to ensure compliance. However, overall, non-compete do not exist in employment agreements within these states.
What Should Employers and Employees Do?
If you are a business owner or employee, now is a good time to review your current employment agreements. Make sure you fully understand any non-compete clauses and their implications. If you are entering into a new employment agreement, ensure the terms are clear and compliant with your state’s regulations. It’s always a good idea to consult a lawyer to avoid any potential issues down the line. Understanding that these clauses are now fully enforceable in the states that allow them, you may want to renegotiate the terms to protect your business, or yourself, for the future.
Final Thoughts
Although non-competes are still very much enforceable across the United States, the legal landscape is constantly evolving. Keeping yourself informed about these changes is crucial for ensuring that your business practices are legally sound or as an individual, that you are protected and able to work after your termination with a prior employer.
If you have any questions, please consult your attorney for further discussion.
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