On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed new rule which could fundamentally upend existing Texas law concerning noncompete clauses in employment agreements. The FTC stated that this action is necessary because noncompete clauses can stifle competition and lower worker wages. The big question is whether this proposed action will achieve the intended outcomes.
The implications of this new rule for executive compensation agreements could be profound. At a virtual forum hosted by the FTC on February 16, 2023, trade groups representing human resources professionals, retailers, health care businesses, asset managers, insurance brokers, and other types of business organizations argued that the FTC proposal is too broad. But the proposal is supported by unions and workers including doctors, nurses, veterinarians, home care workers, and teachers. The ban, they argue, would boost wages and increase competition, thus stimulating the economy. The comment period will remain open until March 20, 2023.
The Supreme Court’s Threshold for Nationwide Rules Proposed by Federal Agencies
Some speculate that, if this rule is adopted by the FTC as proposed, it is nearly certain to face a Supreme Court challenge. In a 2022 case involving the EPA, the Supreme Court handed down a decision that sharply limited the reach of a federal regulatory agency under what the Court termed “the Major Questions Doctrine.”
Separately, in February 2023, a bipartisan group of Senators re-introduced a bill called the Workforce Mobility Act of 2023. This legislation would largely ban the use of noncompete clauses in employment agreements nationwide as a matter of federal law. Does this initiative anticipate a Supreme Court move to strike down the proposed rule if it becomes final?
Contact Our Employment Lawyers for Your Noncompete Questions
To see an article about employment contracts click here Employment Contracts in Texas. To see another article about noncomplete enforceability in Texas click here Noncompete Enforceability in Texas. Prevent legal exposure. Click here to reach out to our employment lawyers contact Kilgore & Kilgore. Now is the time to review your existing noncompete and employment agreements to ensure they are aligned with prevailing law.
Current Texas Noncompete Law
Questions about the enforceability of noncompete clauses in employment agreements have typically been a matter of state law. In Texas, for example, these agreements must comply with the Covenant Not to Compete Act contained in Chapter 15 of the Texas Business and Commerce Code. This law provides that a noncompete agreement is enforceable if it is:
- part of an otherwise enforceable agreement,
- supported by adequate consideration,
- no more restrictive than necessary to achieve legitimate business goal, and
- sufficiently limited regarding geographic area, time, and scope of activity.
Noncompete agreements are also subject to the Texas Antitrust Act of 1983, which imposes similar requirements. Texas is far less restrictive of noncompete clauses than several states that have banned them completely and others that set income thresholds below which they may not be imposed. As proposed, any new federal rule will supersede all state laws that are inconsistent with its terms, essentially federalizing noncompete law.
Will the Proposed Rule Rescind All Active Noncompete Clauses?
If adopted, the proposed rule will require all employers that use agreements with a noncompete clause to rescind that clause. The ban would also extend to “de facto” noncompete clauses that have the effect of prohibiting workers from seeking or accepting employment or operating a business after their current employment. This may extend to restrictions affecting the disclosure of confidential information and customer non-solicitation restrictions. In the “de facto” category, limits may also include:
- prohibiting a former employee from doing business with former clients or customers of the employer,
- prohibiting a former employee from hiring or recruiting a former employer’s worker, and
- requiring the former employee to pay the former employer a sum of money if s/he engages in certain conduct spelled out in the non-competition clause.
Any provision offered in exchange for the prohibited agreement, (such as severance pay) would, however, remain intact. Employers would be required to communicate individually with current and former employees subject to the banned clause. The proposed rule would not affect:
- banks, savings and loans, and federal credit unions,
- common carriers and air carriers, and
- members of the livestock, meat, and poultry industries who are otherwise
subject to the Packers and Stockyards Act of 1921.
The proposed rule also contains a sale-of-business exception for individuals with at least a 25 percent ownership stake in the business. It is not yet clear how the proposed rule would affect employee benefit plans or consulting agreements that contain claw back clauses requiring repayment of previously paid compensation in the event of a non-compete breach.
Our Employment Lawyers Can Help With Noncompete Clauses and Employment Agreements
The proposed rule is likely to be modified before either becomes final and, even then, will not take effect until 180 days after publication. It is always wise to position your company to be nimble and anticipate changes imposed by new laws. Human resource professionals, business owners and executives should review their employment agreements and consulting agreements. Our employment lawyers can help you assess your situation and craft the best options for you going forward. Click this link to learn more about our Executive Compensation law practice. Use this link to get the conversation started Contact Kilgore & Kilgore.