Non-Compete Agreements in Texas?

With all new executive agency rules—at least the important ones—come the lawsuits challenging them.

Remember, the Waters of the United States (WOTUS) rule?  The 2015 Clean Water Rule was repealed by the 2019 Rule.  Then the 2019 Rule was replaced with the Navigable Waters Protection Rule. Then, a “final” rule to amend the “Revised Definition of ‘Waters of the United States” was issued in January 2023.  And again, on August 29, 2023, another final rule amended the January 2023 Rule.

Coming Next—A Long Round of Challenges to the Non-Compete Rules

The latest executive agency ruling making the headlines has to do with The Federal Trade Commission (“FTC) ruling regarding non-compete agreements. A non-compete is an agreement between an employer and an employee, where in exchange for consideration (typically training), the employee will not leave a company and go to another company to compete against it.  The non-compete language typically is limited to a geographic area and a time period of one or two years.

If drafted correctly, the agreement is also limited to particular duties or activities. For instance, a salesperson is prohibited from jumping ship and going to another company to be a salesperson.  But, if the employee was in sales at company #1 and was hired to be a project manager at company #2, the non-compete most likely would not apply.  

The FTC effectively banned non-compete agreements with narrow exception by doing three basic things:

1.  disallowing non-compete agreements with workers, except senior executive management over $151,000 in yearly compensation that are already in place
2. disallowing employers from entering into or enforcing new non-competes with senior executives
3. requiring employers to provide notice to anyone with such a non-compete that they are not enforceable

But just before the FTC Rule’s effective date (September 4, 2024), Ryan, LLC, a Texas tax services firm, the United States Chamber of Commerce and few others sued the FTC in federal court in North Texas.  And Texas Federal Judge Ada Brown’s ruling blocked enforcement of the FTC Rule, at least for now. 

Procedural Rules vs. Substantive Rules

Using the recent United States Supreme Court Loper Bright case that struck down the Chervon doctrine^[1], Judge Brown reasoned that Congress only gave the executive agencies the power to issue procedural rules, not substantive rules. Procedural rules govern the process of how the law is applied and enforced.  Substantive rules define the actual rights and duties of individuals and entities to determine what constitutes a legal violation. Judge Brown’s ruling said the FTC Rule is a substantive one that was issued by the FTC not Congress. 

Her second argument was that the FTC Rule is arbitrary and capricious, overbroad and does not target specific, harmful types of non-competes.  She said the FTC Rule imposes an improper one-size-fits all approach.  The opinion’s result is a judgment setting aside the FTC Rule.

Under the Administrative Procedures Act, Judge Brown’s Ruling Arguably Has a Nationwide Effect

Any attempted appeal to the conservative Fifth Circuit by the FTC would likely be futile and would further strengthen the countrywide enforcement of the injunction.  This is likely to be a long drawn-out battle that will reach the United State Supreme Court at some point.

So, Are Non-Competes Still Enforceable? 

Yes, for now.  Judge Brown’s ruling does not affect current state laws governing non-competes.  But if you use them, be sure to keep them limited in scope and time. Actually providing the consideration (training) given in exchange for the non-compete is also important.

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[1] For years courts were required to give legal deference to executive agencies rules, not anymore.  Refreshingly, Courts can now use their independent judgment when decided agency rules and actions. 

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UPDATE: 

In the last Legal Perspective post, Mr. Motes wrote about the Corporate Transparency Act (“CTA”) passed in conjunction with the U.S Anti-Money Laundering Act of 2020. The law was passed in January 2024.  As a follow-up to the publication, regarding the Beneficial Ownership Information (BOI) reporting requirements of the Corporate Transparency Act (CTA) two clarifications should be made:

–The exemption for filing the BOI Reports is now: Companies with more than 20 employees plus $5m in sales.
–The reporting requirement is now amended: You only need to file one time. There is no annual filing requirement, unless you change ownership; then you have to update.

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