Recently, the Federal Trade Commission (FTC) and the U.S. Chamber of Commerce clashed on the topic of noncompete agreements. The FTC, after receiving over 26,000 public comments, voted to ban nearly all noncompetes. The FTC argues that noncompetes, which restrict workers from joining competing businesses or starting their own, hamper competition for labor, leading to lower pay and benefits for workers. The FTC estimates that lifting these restrictions could boost employee earnings by $400 billion or more over 10 years.
On the other hand, the U.S. Chamber of Commerce, along with other business groups, has filed lawsuits challenging the FTC’s ban. They argue that noncompetes are vital for companies to protect their intellectual property, customer relationships, and other investments. They also contend that noncompetes promote investments in training. The Chamber asserts that the federal government has never regulated noncompete contracts and that Congress never authorized the FTC to take over for the states.
These actions by the FTC and Chamber follow closely on a recently signed California bill prohibiting employers from entering into or enforcing noncompetes that are void under California law, even if initially executed in another state. In California, non-compete agreements are already highly restricted and generally void, except for specific statutory exceptions like business sales or partnership dissolutions. This new law also requires employers to notify current and former employees about unlawful noncompete covenants in their employment agreements.
Texas law states that a noncompete agreement is only enforceable if it:
Is part of or ancillary to an otherwise enforceable agreement
Contains reasonable restrictions on time, geographical area, and scope of activity
Is supported by valid consideration, such as something of value given to the employee
Does not impose restraints greater than necessary to protect the employer's interests
Is narrowly tailored and necessary to protect the employer's legitimate business interests
The FTC’s ban is set to take effect in four months. However, the Chamber and other business groups have filed their lawsuits in conservative judicial districts where courts have been skeptical of what they see as federal agency overreach. This could potentially lead to a temporary block of the rule before it takes effect. The outcome of these lawsuits will determine the future of noncompete agreements in the U.S. and could significantly impact both employers and employees.
Should you have any questions or concerns about the Legal Issues addressed in this blog post, please reach out to Derek Saunders, Keith Strahan, or Richard Armstrong of our firm, shown here: https://lfbrown.law/our-team
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