FTC’s Ban of Noncompete Agreements Halted
With the rule recently struck down by a Texas court, how should employers, including labs, handle such agreements going forward?
In June, Lab Industry Advisor covered the Federal Trade Commission’s (FTC) scheduled ban of noncompete agreements and how it could impact the healthcare industry, including laboratories. Various entities issued their opinions on the rule, and court filings ensued from those opposed to it.1 Recently, a Texas federal court struck down the rule in one of those lawsuits, with the FTC planning to appeal the decision. Here’s a summary of how we got to this point, as well as advice on how employers should handle noncompete agreements with employees as they await the outcome of the FTC’s appeal:
Background on the rule and the AHA’s opposition
Before the final rule was issued by the FTC in April, the American Hospital Association (AHA) made their stance clear. In an open letter to current FTC chair Lina Khan, they disclosed their opposition to the noncompete ban based on their belief that the FTC does not have the authority to issue such a rule. The AHA also disagreed with the “one-size-fits-all” approach the rule takes to regulate noncompete agreements for employees of all industries in the United States with few exceptions. The letter requested that the proposed rule be withdrawn, given that individual states have long regulated noncompete agreements “in a nuanced manner,” particularly when it comes to the healthcare field. Should the rule move forward, they asked that hospitals be exempted, pointing out that a ban on noncompete agreements would only worsen the ongoing shortage of healthcare workers.2
“The proposed rule would profoundly transform the healthcare labor market—particularly for physicians and senior hospital executives,” the letter states. “It would instantly invalidate millions of dollars of existing contracts, while exacerbating problems of healthcare labor scarcity, especially for medically underserved areas like rural communities.”2
However, the FTC did not grant this exemption, adopting the final rule banning noncompete agreements on April 23, 2024, with a scheduled implementation date of September 4, 2024.3
The same day the FTC issued the rule, the AHA reacted publicly in a press release, describing the “sweeping” rule as “bad law, bad policy, and a clear sign of an agency run amok.” The association predicted that courts would be “almost certain to stop [the rule] before it can do damage to hospitals’ ability to care for their patients and communities.”4
The AHA’s prediction was correct, and, before the ban could go into effect, a Texas federal judge struck it down. Global tax consulting firm Ryan, LLC challenged the rule in Texas, and, on August 20, 2024, the United States District Court for the Northern District of Texas granted summary judgment to the firm, effectively blocking the ban from being implemented or enforced.5,6 However, in an update on the FTC webpage for the noncompete rule, the FTC states that “[t]he district court’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”3
On October 18, the FTC formally appealed that ruling in the Fifth Circuit Court of Appeals, but for the foreseeable future at least, noncompete agreements are again allowable.7
How was the ban struck down?
After the FTC’s rule was passed in April, various legal challenges were raised, some of which are still being litigated. Ryan, LLC was the first to bring suit against the FTC for the ban.5 In early July, the company was granted a preliminary injunction motion, which prevented the rule from being enforced, although only for Ryan LLC, specifically. The injunction did not have a nationwide effect on the ban.
Later in July, in one of the other cases, a federal court in Pennsylvania sided with the FTC, denying a preliminary injunction designed to prevent the rule from taking effect. The court concluded that the FTC did, in fact, have the authority to pass the rule.8 However, this was a previewed position, and the final ruling on the merits of this case is still pending.
In August, a Florida court agreed with the Ryan LLC ruling and issued their own preliminary injunction to prevent the FTC rule from taking effect but which was only applicable to the plaintiff in that Florida case, Properties of the Villages, Inc.9 As with Ryan LLC, the court sided with the plaintiff’s’ argument that the FTC did not have the authority to enact such a ban, although the Florida ruling also had no nationwide impact on the rule. The FTC has filed to appeal the Florida court’s decision.10
The inconsistency of these rulings, with courts in Texas and Florida issuing injunctions to halt the ban for the plaintiffs while a Pennsylvania court disagreed entirely, left employers confused about what to do with existing noncompete agreements with their employees, as well as what documents to execute when hiring new employees.
Then, in late August, a federal judge in Texas decided via summary judgment that the FTC exceeded its authority, ruling that the ban was unlawful. This decision effectively struck down the ban nationwide, providing clarity for the near future: the FTC rule can no longer render existing noncompete agreements unenforceable, and employers aren’t required to take any of the actions set forth in the rule.6
While there is some level of certainty now for employers given the Texas judge’s striking down of the ban, things could change with the FTC’s appeal. Marc Casarino and Karine Sarkisian, partner and associate, respectively, at Kennedys Law LLP, write that this case could ultimately reach the Supreme Court of the United States, where a non-appealable conclusion would be reached regarding the FTC’s authority to issue and enforce such a rule.11
What should labs and other employers do about noncompete agreements now?
As for what the rule being struck down might mean for laboratories and their staff, Mary Leigh Pirtle, member at Bass, Berry & Sims law firm, notes via email that the legal battle over this rule will be ongoing for some time. She says the appellate process will likely take several months, but “employers should be aware that the Fifth Circuit is viewed as a more favorable venue for opponents of the rule.”
In response to President-elect Trump’s recent announcement of Andrew Ferguson as the next FTC chair,12 Pirtle adds, “Commissioner Ferguson has previously expressed his opposition to the noncompete rule and on December 4 issued a dissenting statement in which he claimed the FTC ‘wildly exceeded’ its authority in issuing the rule. I expect with this change in leadership, the FTC will abandon the pending appeals. However, according to the docket activity, the FTC is moving forward with its appeal for now. The FTC filed a Record of Appeal on November 25, 2024, and it filed its appeal brief on January 2, 2025—before the administrative change.”
Pirtle’s advice: given where the ruling currently stands, employers should continue proactively protecting their legitimate business interests through employee arrangements such as noncompete agreements. She notes that, even without the FTC ban on these agreements, there are “a myriad of state laws which set forth strict limits on an employer’s ability to restrict post-employment competition, especially within the healthcare industry.” As a result, healthcare companies should carefully consider exactly what they need to protect and employ specific strategies narrowly aimed at guaranteeing those interests are protected. “For instance,” she elaborates, “a traditional noncompete [agreement] may not be necessary if the employer can achieve the same protections with a non-solicitation of customers and employees provision.”
Similarly, Pirtle explains that “employing the protection of a strict confidentiality provision and intellectual property laws may be sufficient to protect against unauthorized disclosure of proprietary information.” Essentially, she advises that there are other tools available to employers that are not subject to scrutiny under the FTC rule, regardless of what happens legally with the proposed noncompete ban. During this time of uncertainty on noncompete agreements, laboratory and other leaders in the healthcare space would do well to explore these other tools to ensure their business interests are protected.
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