Restrictive Covenants & Non-Compete Agreements
At the Law Office of Kevin O’Mahony, we represent healthcare providers, businesses and professionals regarding restrictive covenants in their contracts. Specifically, we review, prepare, negotiate, litigate and advise clients concerning:
- Non-Compete Agreements
- Non-Solicitation Agreements
- Non-Disclosure & Confidentiality Agreements
- Employment Agreements Containing Restrictive Covenants
- Business Sale Agreements Containing Restrictive Covenants
- Severance Agreements Containing Restrictive Covenants
- Settlement Agreements Containing Restrictive Covenants
Most professionals and businesspeople are familiar with restrictive covenants, either as an employee being asked to sign one before starting a new job, or as an employer seeking to enforce one to protect their business from competition. A restrictive covenant is any agreement between parties that limits an individual’s ability to engage in certain activities for a period of time.
Restrictive covenants are generally used to protect an employer or business owner(s) from unfair competition by an employee who potentially could take patients, other employees or confidential or proprietary information with him or her upon departure from the employer, practice or business. Employment agreements that contain properly drafted restrictive covenants, including noncompete agreements, non-solicitation agreements, non-disclosure and confidentiality agreements, are essential to adequately protect employers and business owners’ intellectual property and other proprietary rights. Medical groups, for example, often use restrictive covenants to protect their owners’ investments in individual physicians and other healthcare providers, by encouraging them to remain employed with the medical group, or at least not compete with them in their service area for a specified period after they leave.
One of the first questions often posed by an employer, business owner, seller, partner, employee or former employee to an attorney is: “Is this noncompete agreement (or other restrictive covenant) enforceable?” Unfortunately in Georgia, rarely is the correct answer just a simple “yes” or “no.” In most cases, it will depend upon the particular facts and circumstances.
Enforceability of restrictive covenants has been a heavily litigated issue for many years due to public policy concerns, such as an individual’s right to earn a living in his or her chosen profession, and (in the medical realm) a patient’s right of access to the physician or other healthcare provider of his or her choice. Moreover, Georgia courts have historically been particularly skeptical of overreaching restrictive covenants in the healthcare arena. Consequently, restrictive covenant clauses that are too broad risk being deemed unreasonable and unenforceable. Additionally, the federal Stark law places constraints on the use of restrictive covenants in physician recruitment activities.
So the mere existence of an “agreement” does not necessarily mean that it is valid or enforceable. Proper assessment of the enforceability of a restrictive covenant requires careful evaluation of numerous factors. A court typically will evaluate the reasonableness of a restrictive covenant based upon its duration (time), geographic scope (territory), and the scope of the prohibited activity.
The best way to assess whether a covenant’s duration, territory or scope of restricted activities will likely be viewed by a judge as reasonable is through legal research and analysis of court decisions that involve similar facts. The process of finding and properly evaluating such decisions (most of which are factually and legally complex and require careful review) is often time-consuming and difficult, if done correctly. But when the financial stakes are sufficiently large, retaining qualified counsel to perform these tasks is well worth the expense.
The Georgia Restrictive Covenants Act
In late 2010, Georgia enacted a new law, the Georgia Restrictive Covenants Act (“RCA”), codified at O.C.G.A. § 13-8-50, et seq., which made it easier to enforce noncompete clauses entered into on or after May 11, 2011. The RCA includes several provisions that have led to significant changes in drafting and litigating non-competition agreements in Georgia. Most of the changes are considered more favorable to employers than employees. For example, Georgia courts may now “blue pencil” agreements (i.e., modify or re-write overly broad contract provisions to render them enforceable). Courts also may evaluate noncompete and non-solicitation agreements separately, and enforce one without regard to the enforceability of the other. And “confidential information” is now defined in such a way as to enhance the enforceability of non-disclosure provisions.
But the RCA does not guarantee that at least some restriction will be enforced in every case. The RCA permits, but it does not require, judges to modify overbroad restrictions. Although the RCA gives judges the power to modify overbroad or otherwise invalid restrictive covenants to the extent necessary to make them enforceable, the RCA does not require judges to do so. Instead, such modifications are discretionary, and judges have wide latitude in deciding whether and how to exercise that discretion. They therefore may still refuse or decide not to enforce overbroad restrictions. In other words, judges may blue pencil, and even re-write, covenants to make them enforceable. But they do not have to. And it is difficult to predict with any degree of certainty in advance whether a particular restriction will be enforced when it finally is ruled upon, particularly when the views of the judge who will hear the case are unknown.
The RCA also includes some provisions that favor employees. For instance, lower level employees may be exempt from particular provisions of the law, if they do not have certain skills, abilities, customer (client or patient) contacts or confidential information. Also, an employee can demand clarification of a restrictive covenant, and the employer must respond within 30 days. And a failure by the employer to respond to such a demand can be considered against the employer by a court. Overall, however, the RCA has made it somewhat easier for employers to enforce restrictive covenants against employees in Georgia – although the case law is only slowly developing, and the precise contours of the law remain unpredictable.
Executive Order Targets Noncompete Clauses
President Joe Biden signed an executive order on July 9, 2021, seeking a ban or limitation on noncompete clauses and some licensing requirements for workers. President Biden ordered federal regulators to crack down on noncompete clauses, occupational licensing requirements and other measures that administration officials say harm employees’ ability to pursue better jobs, as part of a broad executive order intended to bolster competition across the economy.
The order encouraged the Federal Trade Commission (“FTC”) to ban or limit noncompete agreements, which employers increasingly have used in recent years to try to inhibit employee moves to competitors. The effectiveness of the order will depend on whether regulators can devise and carry out the rules the president seeks in ways that survive legal challenges. Many of the policies that labor economists consider problematic for employees, including enforcement of noncompete provisions, are set at the state level, leaving a limited federal role.
Nonetheless, the executive order demonstrates the administration’s adherence to a growing school of economic thought that urges more aggressive government action to break up monopolies and inject increased competition into the economy. Noncompete agreements in healthcare have recently been in the federal government’s crosshairs. For example, in January 2021, a federal grand jury charged UnitedHealth Group-owned Surgical Care Affiliates and its related entities with conspiring with other healthcare companies to suppress competition between them for the services of senior-level employees. The full executive order can be viewed here.
Once this executive order was issued, employers and employees wondered whether their noncompete agreements were illegal as a result of the president’s order. The short answer was (and still is, as of this writing) no. But until actual proposed rules were presented, there was no way to know how far the push to limit the use of noncompete agreements would go.
FTC Issues Proposed & Final Rules Banning Certain Noncompetes
On January 5, 2023, the FTC released a proposed rule that would ban noncompete clauses in employment agreements as an unfair method of competition. According to the FTC, noncompetes, which are widely used in the healthcare industry as well as other industries, suppress wages and harm competition in U.S. labor markets.
The proposed rule would prohibit employers from using noncompete clauses for employees and independent contractors. Employers also would be required to rescind any existing noncompetes and actively inform workers that they are no longer in effect.
FTC Chair Lina M. Khan stated that “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy.” “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
On the other hand, U.S. Chamber of Commerce Senior Vice President Sean Heather called the proposed ban “blatantly unlawful.” According to Heather, “[a]ttempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”
Comments on the proposed rule were due 60 days after publication in the Federal Register. So, employers and employees were advised to be on alert for further developments.
On March 27, 2023, Kaiser Health News (Meyer) reported that the FTC in January proposed “prohibiting noncompete clauses in employment contracts,” arguing that “ending those provisions would boost economic competition, reduce prices, and increase workers’ earnings overall by up to $296 billion a year.” Additionally, “eliminating noncompete contracts would allow doctors to practice wherever their services are needed, which would improve patients’ access to care.”
However, the report noted that “the FTC’s proposal faces resistance from employers in all industries, including hospitals and private equity-backed medical groups that employ thousands of physicians, nurse practitioners, and other medical professionals.” As such, “business and hospital groups are likely to sue to block the rule, arguing that Congress hasn’t authorized the commission to regulate noncompete clauses.” Although “there is bipartisan support in Congress for legislation that would restrict noncompete clauses and authorize FTC action, the bill hasn’t advanced,” and “similar legislation stalled in past years.”
The number of responses the FTC received to its proposed rule extended the estimated timing of a final rule, with the FTC expected to vote on a final rule as late as April 2024. Given the current makeup of the FTC’s commissioners, a ban was expected to pass in some form, even if not as broad as first proposed. Once any final rule became effective, litigation challenging its validity was almost certain, with opponents pledging to sue the FTC over any ban. Such litigation will take months or longer, and the outcome of any lawsuit is unpredictable.
Uncertainty regarding the proposed FTC rule (which is now final – see below) was deemed likely to continue well into 2024, and probably beyond. Additionally, a bipartisan group of U.S. senators introduced the Workforce Mobility Act of 2023, which, if passed, would also prohibit the use of non-competition provisions across the nation. As of this writing, it is unknown whether this or similar federal legislation will be enacted or when it will become effective.
In the meantime, healthcare entities should monitor the changing environment surrounding noncompete provisions and the FTC’s proposed (and now final) rule at the federal level, as well as any changes in laws at the state level. Especially with new contracts, healthcare clients should evaluate what they want to achieve with their noncompete provisions and consider whether their objectives could be achieved in less restrictive ways that might minimize the risks of potential legal challenges or invalidation of their non-competes later.
On December 7, 2023, HHS, the FTC, and the U.S. Department of Department of Justice announced several new actions to promote competition in healthcare and support lower prescription drug costs. The actions included launching a public inquiry into how private equity and other corporations’ increasing power and control of healthcare is affecting Americans; identifying anticompetitive “roll ups” (a strategy in which a series of small acquisitions can lead to market consolidation and contribute to worse patient outcomes); and increasing ownership transparency.
On April 16, 2024, the FTC announced it would decide on April 23, 2024 whether to issue a final rule that would prohibit most employers from enforcing noncompetes against workers. The FTC issued the controversial proposed rule (88 Fed. Reg. 3482) in 2023 with an initial 60-day comment period, which later was extended due to the high volume of comments. The FTC said it received more than 26,000 comments on the proposal.
According to the FTC, noncompetes, which are widely used, including in the healthcare industry, suppress wages and harm competition in U.S. labor markets. The proposed rule would prohibit employers from using noncompete clauses for employees and independent contractors. Employers also would be required to rescind any existing noncompetes and actively inform workers that they are no longer in effect.
In announcing the April 23 vote, the FTC said the proposed final rule under consideration “would generally prevent most employers from using noncompete clauses.” The FTC said it would not take additional public comments at the April 23 meeting.
On April 18, 2024, the FTC, DOJ and HHS also jointly launched a new online portal, HealthyCompetition.gov, for the public to report potentially anticompetitive healthcare practices. DOJ’s Antitrust Division and the FTC will review the complaints initially. If they determine the complaints raise sufficient antitrust concerns, they will escalate them to the appropriate agency for further investigation.
Assistant Attorney General of the Antitrust Division Jonathan Kanter called the new portal “a one-stop shop to report potential violations of our competition laws to the Justice Department and FTC,” which “will allow the agencies to collaborate early and often, helping to promote economic opportunity and fairness for all.”
“All too often, we hear how unfair methods of competition and monopolistic practices may be depriving Americans of access to affordable, high-quality healthcare,” said FTC Chair Lina Khan. “This joint initiative between FTC, DOJ and HHS will provide a crucial channel for the agencies to hear from the public, bolstering our work to check illegal business practices that harm consumers and workers alike.”
Then, on April 23, 2024, the FTC announced it was issuing a final rule to promote competition by banning noncompetes nationwide, saying it would protect the fundamental freedom of workers to change jobs, increase innovation, and foster new business formation. “Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.” The final rule defines senior executives as workers earning more than $151,164 annually who are in policy-making positions.
The announcement went on to say: “In the final rule, the Commission has determined that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes.” However, the Commission eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change should help streamline compliance, at least somewhat. Instead, under the final rule, employers will have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future. To assist employers’ compliance with this requirement, the FTC included model language in the final rule that employers can use to communicate to workers.
The new rule banning noncompetes does not apply to those related to the sale of a business. The sale of a business has generally been the most favored situation for a court to uphold a noncompete, under the rationale that a buyer should be able to bar a seller from opening a competing business right next to the one he just sold. And the final rule expressly allows a non-competition clause to prohibit a seller from competing with a buyer in connection with the sale of a business. However, key employees who are not sellers but whose employment is expected to continue after the sale of a business cannot be bound by noncompetes under the new rule.
The final rule was set to become effective 120 days after publication in the Federal Register. Once the rule is effective, information about a suspected violation of the rule can be reported to the Bureau of Competition by emailing noncompete@ftc.gov. A Fact Sheet on the FTC’s Noncompete Rule appears here.
Legal challenges were certain to follow, including: (1) whether the FTC has authority under the Federal Trade Commission Act to establish such a wide-reaching ban infringing on the freedom to contract; and (2) whether the agency can so forcefully preempt an area of law that, to date, has been governed by state law. Opponents may argue that the relevant federal statute is too vague to guide the agency in promulgating a rule banning noncompetes, and the evidence the agency has on their effects is too limited to support such a rule. They may also argue that the FTC’s action is an impermissible delegation of Congress’ legislative authority under the non-delegation doctrine.
As STAT (Bannow, Subscription Publication) reported on April 23, 2024, these “changes may not take effect for years – if they ever do – because the contentious rule will almost certainly be held up in litigation.” The article noted that “Crucially for the health care industry, the noncompete ban does not apply to nonprofit companies, as the FTC determined it only has jurisdiction over for-profit companies.” This “means the ban likely won’t apply to most of the country’s hospitals, the majority of which are nonprofit, and some of the country’s biggest health insurers.” However, there is one significant exception. “The final rule holds that if a tax-exempt company is organized in a way that seeks to drive profit to its members, the FTC can treat that company as for-profit and make it subject to the ban. That could include certain cases where nonprofit hospitals have relationships with for-profit physician practices.” Indeed, many nonprofit hospitals contract with for-profit staffing agencies or physician groups, which would be covered by the final rule.
Court Challenges to FTC’s Noncompete Rule
Two lawsuits were filed within one day of the FTC issuing its final rule – one by the Chamber of Commerce in the U.S. District Court for the Eastern District of Texas and the other by a tax services and software company in the Northern District of Texas – each challenging the final rule and arguing that the FTC lacked the authority to issue it. Many experts expected that one or both courts would issue a nationwide injunction staying enforcement of the final rule until the issue can be decided on the merits and, ultimately, by a higher court.
In addition, many believe the final rule may violate the Major Questions Doctrine, which holds that Congress presumptively does not delegate to executive agencies issues of major economic or political significance, absent a clear expression of its intent to do so. The FTC is not an executive branch agency, but an independent agency set up under Congress’ authority and oversight, so time will tell what the courts decide.
Moreover, at least one U.S. Supreme Court case the justices were expected to decide in 2024 asked the court to renounce a decades-old doctrine of judicial restraint known as Chevron deference, which required judges to defer to an administrative agency’s policy choices as long as the choice is plausibly within the boundaries of the agency’s statutory authority. Conservative justices appeared poised to limit or strike down the Chevron doctrine for various reasons. And if the Supreme Court narrowed or overruled the Chevron doctrine, the FTC’s rule banning noncompetes would seem less likely to survive.
Then, on June 28, 2024, in Loper Bright Enters. v. Raimondo, No. 22-451, and Relentless v. Department of Commerce, No. 22-1219, in 6 to 3 votes dividing along ideological lines, the Supreme Court did indeed reduce the authority of executive agencies, and swept aside the longstanding Chevron v. Natural Resources Defense Council precedent that required courts to defer to the expertise of federal agencies in carrying out laws passed by Congress. Although the Loper and Relentless cases specifically involved environmental regulations and interpretation of a federal fishery law, the Supreme Court’s decision will almost certainly have enormous implications for heavily regulated industries like healthcare and life sciences.
Healthcare is one of the most heavily regulated industries in the nation. Multiple federal and state agencies perform oversight and provide guidance on numerous complex regulations that direct the provision of care and products to patients. But the legal strength of agencies’ regulatory guidance was very much put in question by the Supreme Court’s Loper Bright decision and elimination of Chevron deference.
The FTC’s final rule banning most noncompetes was published in the Federal Register on May 7, 2024. And the rule was scheduled to become effective, absent a court enjoining it beforehand, on September 4, 2024.
On July 3, 2024, a federal judge in Texas became the first to rule on the legality of the FTC’s noncompete ban in Ryan, LLC v. Federal Trade Commission, No. 3:24-CV-00986-E (N.D. Tex. July 3, 2024). As expected, the court concluded that a preliminary injunction was appropriate, and temporarily enjoined the noncompete ban from going into effect against the named plaintiff/intervenors. However, the court declined to issue a nationwide injunction to non-parties. Consequently, at least as of early August 2024, the FTC’s non-compete ban remained set to take effect on September 4, 2024 for covered employers not named parties in the Ryan lawsuit.
In reaching its conclusion, the federal district court in Texas held that the FTC’s rule banning most noncompetes is likely unlawful for two reasons: (1) the FTC likely exceeded its statutory authority because it does not have substantive rulemaking authority to craft rules regarding unfair methods of competition; and (2) a categorial ban on nearly all noncompetes would likely be arbitrary and capricious because it is overly broad without reasonable explanation. However, the court was not convinced that it would be appropriate to immediately issue a nationwide injunction that would extend to non-parties because such relief is unnecessary to protect the interests of the named parties (which is the standard at the preliminary injunction stage).
The court ordered the parties to submit a joint status report by July 9 to determine the case’s next steps, and it promised to issue a final decision on the merits of the entire lawsuit by August 30. That decision could result in a more expansive nationwide injunction that would extend to non-parties.
By contrast, on July 23, 2024, a federal judge in Pennsylvania declined to block the FTC’s ban on most noncompete agreements. In ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743 (E.D. Pa. July 23, 2024), Judge Kelley Brisbon Hodge ruled that the plaintiff employer had not proved that it would suffer irreparable harm from the FTC rule and denied the company’s motion for a preliminary injunction.
ATS Tree Services, a tree-removal company, had filed the lawsuit, arguing that it used noncompetes to “provide its employees with necessary and valuable specialized training while minimizing the risk that employees will leave and immediately use that specialized training and ATS’s confidential information to benefit a competitor.” But the judge said the company was unlikely to ultimately prevail on the merits.
Citing the statutory text and purpose, as well as Nat’l Petroleum Refiners Ass’n v. FTC, 482 F.2d 672, 673 (D.C. Cir. 1973), the Pennsylvania federal district court found the FTC was empowered to make both procedural and substantive rules to prevent unfair methods of competition. “Nothing in Section 5 or Section 6 expressly limits the FTC’s rulemaking power to issuing exclusively procedural rules,” nor does the text of the statute limit the Commission’s enforcement mechanisms to adjudications, the court said. Rather, those sections “authorize the FTC to promulgate ‘rules and regulations’ as one of its tools to prevent unfair methods of competition.” In the Pennsylvania federal district court’s view, the FTC’s statutory mandate to “prevent” unfair methods of competition was “an inherently forward-looking directive, requiring the FTC to take action to avoid or avert a future occurrence in addition to remediating or stopping past harm.”
Judge Hodge’s decision “fully vindicates” the FTC’s authority to ban noncompete clauses, “which harm competition by inhibiting workers’ freedom and mobility while stunting economic growth,” an FTC spokesman reportedly said in a statement. A lawyer representing ATS initially declined to say whether the company would appeal. But ATS later withdrew its case. Therefore, as of mid-August, the FTC rule was still set to take effect on September 4, 2024.
On August 15, 2024, the United States District Court for the Middle District of Florida enjoined the FTC from enforcing its noncompete rule against the plaintiff in Properties of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-316-TJC-PRL. But the plaintiff in that case did not request nationwide relief in its motion, and the Florida federal district court’s decision did not prevent the rule from taking effect on September 4, 2024 as to everyone else.
The Florida federal court’s decision, which it issued during oral argument, found that the plaintiff in that case had established a substantial likelihood of success on the merits because it found that the FTC rule violates the major questions doctrine. The Florida federal court said that the major questions doctrine requires that when an administrative agency claims to have the power to issue rules of extraordinary economic and political significance, it must point to clear congressional authorization for the power it claims. And it found that the doctrine applies where, as in this case, the rule affects a significant portion of the American economy, regulates an area that has previously been the domain of state law, and is a significant expansion of the agency’s regulatory authority. The court held that Section 6 of the FTC Act, which the FTC relies upon, insufficiently demonstrated clear Congressional permission to issue the rule, and therefore the plaintiff in that case had shown a likelihood of success on the merits. The court also found that the plaintiff’s compliance costs were sufficient to establish irreparable harm.
Although both the Texas federal court in Ryan and the Florida federal court in Properties of the Villages reached the same conclusion, the Florida federal court’s reasoning differed from the reasoning of the Texas federal court’s July 2024 preliminary injunction decision in Ryan. The Ryan preliminary injunction decision did not address the major questions doctrine. Instead, it found that the plaintiff in that case was likely to succeed in establishing that the FTC exceeded its statutory authority (an argument which the Florida district court rejected) and that the rule is arbitrary and capricious under the Administrative Procedures Act (which was not alleged by the plaintiff in the Florida case).
Then, on August 20, 2024, in a 27-page Opinion and Order in the Ryan case, Northern District of Texas Judge Ada Brown ruled that the FTC can’t enforce its near-total ban on noncompete agreements that was set to take effect on September 4, 2024. The judge found that the FTC lacked the statutory authority to issue the rule. In reaching her decision, Judge Brown wrote that the “FTC’s promulgation of the Rule is an unlawful agency action.” She said the FTC lacked the authority to enact the noncompete ban, which she said was “unreasonably overbroad without a reasonable explanation.”
In addition to exceeding its authority, Judge Brown said the FTC issued the rule based on “inconsistent and flawed empirical evidence,” while failing to consider evidence supporting noncompete clauses and alternatives to the rule it issued. “The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do,” she wrote. Ryan v. Federal Trade Commission, 3:24-CV-00986-E (N.D. Tex., Aug. 20, 2024).
Consequently, Judge Brown enjoined the FTC’s rule nationwide, meaning that employers may continue to enter into and enforce noncompete agreements with workers, subject to state law. And employers need not issue notice of non-enforcement to workers, which otherwise would have been required by the rule.
The U.S. Chamber of Commerce called the ruling a significant win in its “fight against government micromanagement of business decisions.” The FTC’s rule was “an unlawful extension of power that would have put American workers, businesses and our economy at a competitive disadvantage,” the Chamber said in a statement.
By contrast, FTC spokesperson Victoria Graham said, “We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages.” “We are seriously considering a potential appeal.” If the case is appealed, the U.S. Court of Appeals for the Fifth Circuit (widely considered the most conservative federal appellate court in the country) will conduct its own judicial interpretation of the FTC Act, possibly providing yet another reading of the statute.
The FTC maintains it had the authority to approve its rule banning most noncompetes as part of its duty to prevent unfair methods of competition. The agency also said the August 20, 2024 Texas federal court decision “does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”
With conflicting decisions in the lower courts, employers and employees could face an extended period of legal uncertainty well beyond the rule’s original September 4, 2024 effective date, as lawsuits work through the trial and appellate courts. And the Supreme Court may ultimately have to decide this issue because of its importance to so many.
The Supreme Court’s Loper Bright and other recent agency-related opinions have increased the power of federal courts and reduced the roles of administrative agencies in interpreting federal laws. This has led to more legal challenges and attempts to strike down agency rules. And federal courts have already begun to find agency overreach using independent and varying statutory interpretations.
While all three district courts discussed above applied the U.S. Supreme Court’s Loper Bright standard for courts reviewing federal agency rules, the three courts (one in Pennsylvania upholding the FTC’s rule, and the others in Texas and Florida enjoining it) reached different conclusions. This underscores how applying Loper Bright’s standard, directing courts to exercise their independent judgments in deciding whether an agency has acted within its statutory authority, will create less uniformity across the country – unless and until the Supreme Court speaks again.
On September 24, 2024, the FTC appealed the Florida district court’s preliminary injunction ruling in the Properties of the Villages case to the Eleventh Circuit Court of Appeals. And on October 18, 2024, the FTC filed notice of appeal of the Texas district court’s ruling in the Ryan case to the Fifth Circuit Court of Appeals. Though the FTC’s Eleventh Circuit appeal involving a preliminary injunction is at an earlier procedural stage than the FTC’s Fifth Circuit appeal involving a final order, the existence of two appeals in different circuits creates the possibility of a conflict in circuit court rulings. Such a split would significantly increase the chance of review by the U.S. Supreme Court. So please stay tuned.
In the meantime, employers should consider alternatives in the event the FTC’s ban on noncompetes (or something like it) becomes law. Employers can still protect themselves through properly drafted non-solicitation and confidentiality provisions aimed at protecting proprietary information. The FTC’s final rule did not ban non-solicitation or non-disclosure provisions so long as those provisions do not “function to prevent” a worker from accepting or seeking work with a competitor or starting a competitive business. Indeed, the FTC specifically noted that a non-disclosure provision that prevents a worker from disclosing confidential information to a competitor would not be prohibited under the final rule.
However, the FTC warned employers that they should not turn such provisions into de facto noncompetes by making them so onerous that they effectively prevent a worker from seeking or accepting similar work or operating a competing business. Whether such provisions functionally operate as noncompetes will be determined on a case-by-case basis. Employers should also prepare lists of non-executive employees to whom notices that their noncompetes will not be enforced against them would have to be given if the final rule ever becomes effective.
The FTC’s notices of appeal in both the Florida and Texas cases show that it plans to defend the rule until a final ruling by respective appellate courts and/or the U.S. Supreme Court. And even if the FTC’s final rule is ultimately and fully struck down, enforcing noncompete agreements has become increasingly difficult in many states and impossible in others. Employers should therefore review all their restrictive covenant agreements to ensure they are properly tailored to comply with state laws, and no broader than necessary to protect their confidential information and competitive standing in the market.
Please stay tuned. We will continue to monitor this issue as it develops.
How We Can Help
Despite the inherent uncertainty in this area of the law, based on our extensive experience, we can assess the strengths and weaknesses of your restrictive covenants, and provide helpful, effective guidance, to inform your decision-making process and develop the best strategy. We understand that for employers and business owners, it is critical to protect your practice or business. And for individual healthcare providers and employees, we can help protect your current and future rights.
We have many years’ experience drafting, negotiating, enforcing and litigating employment and other contracts containing non-competition, non-solicitation, confidentiality, anti-piracy and trade secrets provisions for healthcare and business clients in Alpharetta, Atlanta, Cumming, Duluth, Johns Creek, Milton, Norcross, Roswell, Suwanee and all of Georgia. If you need help with a noncompete agreement or other restrictive covenant in Georgia, please contact us.
