By Mel Tull
On July 3, a federal court judge in Texas temporarily blocked the Federal Trade Commission’s non-compete ban from being enforced against the plaintiffs in that case. As you may recall from my May 8 article, “FTC Non-Compete Ban: What Insurance Agencies Need to Know”, the FTC’s rule banning non-compete agreements is scheduled to become effective on September 4, 2024. Immediately after the rule was issued, several plaintiffs filed lawsuits in Texas and Pennsylvania to block the non-compete ban from going into effect claiming the FTC overstepped its authority.
Update
The Texas judge’s July 3 ruling temporarily delays the ban while the merits of the Texas case are fully considered, but the delay only applies to the plaintiffs in the case (the U.S. Chamber of Commerce and a tax preparation firm). The judge declined to block the rule nationwide. Accordingly, the rule is still scheduled to become effective in September for everyone else.
In her ruling, the judge in the Texas case signaled that the rule was likely invalid and that she would issue a final ruling by August 30, shortly before the rule is scheduled to take effect. Meanwhile, there is a similar motion pending in the Pennsylvania case to temporarily block the rule while the merits of that case are considered in full.
In other potentially relevant news, the U.S. Supreme Court recently reversed its so called “Chevron deference.” Under the Chevron deference, courts were required to defer to a federal agency’s interpretation of its authority under ambiguous federal laws. Now that the Chevron deference has been reversed, courts must exercise their own independent judgment when evaluating whether an agency acted within its statutory authority, and must not show deference to the agency’s interpretation of the law or its authority. This recent ruling by the U.S. Supreme Court may impact the rulings in the Texas and Pennsylvania cases as they determine whether the FTC’s general authority to prevent “unfair methods of competition” was sufficient authority for the FTC to issue a rule specifically banning non-compete agreements.
The Rule
As a reminder, the FTC rule prohibits employers from entering into new non-compete agreements or enforcing existing non-compete clauses with workers. Prohibited non-competes are essentially any term or condition of employment that prohibits, prevents or inhibits a worker from leaving one employer to work for a different employer or start a business. The term “worker” is defined broadly to mean any person who works, including an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service. Prior to the rule’s effective date, employers are required to provide written notice to current and former workers informing them that the worker’s non-compete clause will no longer be effective or enforceable.
Exceptions to the Rule
The FTC ban does not apply to several circumstances relevant to insurance agencies, including: (i) confidentiality and non-solicitation agreements; (ii) non-competes entered into pursuant to the sale of a business; (iii) existing non-competes with senior executives; and (iv) actions for the breach of a non-compete that accrued prior to the ban’s effective date.
What Should Agencies do Now?
Because the rule is still scheduled to become effective on September 4, 2024, agencies should continue to prepare to comply with the ban by making the preparations described in my May 8 article, “FTC Non-Compete Ban: What Insurance Agencies Need to Know”. However, in light of the recent court decisions discussed above, agencies should continue monitoring the pending lawsuits for developments that could further delay or entirely block the rule from going into effect.
For more information about, or assistance with, the FTC rule banning non-competes, contact Mel Tull, at Mel@TullLawPLC.com or (804) 404-7748. Mel advises insurance agencies and other companies on general business law matters and buying and selling agencies and books of business.
This article has been prepared for informational purposes only and is not legal advice.
Independent Insurance Agents of Virginia