Non-Competes Live On: FTC Rule Invalidated with Nationwide Effect

Posted on Aug 23, 2024 by

Since its promulgation on April 23, 2024, the FTC’s final Rule, which purported to ban the imposition and enforcement of most non-competition agreements in the United States (the “Rule”), has been the subject of federal litigation in several states. The litigation challenged the FTC’s authority to issue the Rule as well as the legality of the Rule on grounds that it was arbitrary and capricious. The Rule, and the pending litigation, created uncertainty for both businesses and workers. Businesses wondered if they would be prohibited from enforcing existing non-competition restrictions and from imposing new restrictions on and after September 4, 2024, the date the Rule was scheduled to take effect. Workers wondered if they would be able to accept competitive work or employment without fear of being sued for breach of contract.

With just two weeks to go before the Rule’s scheduled effective date, the U.S. District Court for the Northern District of Texas ended the uncertainty for both businesses and workers.  On August 20, 2024, in Ryan, LLC v. Federal Trade Commission, 3:24-CV-00986-E (N.D. Texas), the Court issued a Memorandum Opinion and Order deciding that the FTC had exceeded its authority, that the Rule was arbitrary and capricious, and that the FTC’s promulgation of the Rule was an unlawful agency action. The Court’s decision, which set aside the FTC’s action and the Rule, has nationwide effect. Unless the Court’s decision is reversed on appeal,[1] the validity and enforceability of non-competition agreements will continue to be governed by state law, as has historically been the case.

While restrictive covenant agreements, which include non-competition agreements, are generally disfavored in the law in Wisconsin, they are not invalid per se. Businesses in Wisconsin may enforce these agreements so long as they meet five requirements. To be valid and enforceable, restrictive covenants must:

(1) contain a reasonable time limit;
(2) be reasonable in scope or geography;
(3) be reasonably necessary for protection of the employer;
(4) not be harsh or oppressive on the employee; and
(5) not be contrary to public policy.[2]

Businesses must ensure that each and every restriction contained in a restrictive covenant agreement is drafted independently and that each separate restriction meets the requirements for enforceability under Wisconsin law. The more narrowly a restriction is drafted, the less open to challenge it will be and the more likely that the restriction will be determined to be valid and enforceable, if challenged. It is essential for businesses to have the assistance of legal counsel who is familiar with Wisconsin restrictive covenant law when drafting any type of agreement that imposes non-competition, non-solicitation, and/or non-disclosure restrictions.

The attorneys at McCarty Law have experience with Wisconsin restrictive covenant law and stand ready to assist you with your needs in this area.  Please contact Attorneys Rebecca Kent or Attorney Lora Zimmer if you have questions or needs in this area of the law.

[1] It is anticipated that the FTC will appeal the decision issued in the Ryan case to the Fifth Circuit Court of Appeals and from there the case could proceed to the U.S. Supreme Court for a final, non-appealable decision. The appeal process could take years.
[2] See Wis. Stat. §103.465.

 

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Rebecca L. Kent

Employment & Labor Law and Commercial Litigation Attorney at McCarty Law LLP
Becky assists businesses as they confront the legal questions and challenges that arise each day in the area of human resources. She provides legal services in the areas of employment and labor law and represents clients in employment and business-related litigation.