Background: The FTC’s New Rule and the Difference in Texas
The FTC proposed a rule to limit non-compete agreements nationwide back in April. As a model, they used California’s incredibly stringent non-compete restrictions.
How stringent?
California employers face fines of $2,500 for each violation related to non-competes. This applies whether they are asking employees to sign non-competes or neglecting to inform them of their unenforceability.
As you probably already know, things work a bit different here in Texas. With our pro-business environment, the Lone Star state allows non-compete agreements that are reasonable in time, scope, and geographic limits. You can find the full legal text for how Texas handles non-competes here, and more discussion here and here.
And, of course, there are variations depending where you are in the state. In metropolitan areas like Dallas, Houston, Austin, and San Antonio, local courts sometimes interpret the reasonableness of non-competes more strictly.
Ryan LLC Enters the Arena
After the FTC’s new rule became public, Ryan LLC, a major tax firm based in Dallas, filed a lawsuit in Texas federal court to block its enforcement. On July 3, 2024, the court issued an order that partially enjoins the FTC from implementing or enforcing the rule.
The court’s decision is based on the argument that the FTC does not have the authority for substantive rulemaking under Section 6(g) of the FTC Act, which it believes is limited to housekeeping rules necessary to prevent unfair competition. In fact, the court criticized the FTC’s approach as overly broad and lacking adequate consideration of less restrictive alternatives.
There’s one key word in the court’s order, though: “partially.” What does it mean? In short, the injunction currently applies only to the plaintiffs in the Ryan LLC case. It does not affect employers (i.e. you) beyond the plaintiffs in the Ryan LLC case.
What Does All of This Mean For You and Your Business?
While the current order only applies to Ryan LLC, it leaves open the possibility of a broader injunction in the future. In other words, additional employers may be able to avoid the non-compete changes based on upcoming rulings.
Speaking of which, the court is expected to rule on the merits of the case by August 30, 2024. Regardless of what happens, the losing party will almost certainly appeal this decision, so please stay tuned for updates!
If you have any questions or need guidance on non-compete agreements, please do not hesitate to contact us.
