While the FTC’s fight to invalidate noncompetes continues, employers still need to be thinking about the enforceability of noncompete provisions, especially because the enforceability of noncompete provisions has been and continues to be determined by state law.

A perfect reminder of that is the case of DraftKings Inc. v. Hermalyn.

DraftKings v. Hermalyn

Then-New Jersey resident Michael Hermalyn, a former executive with Massachusetts-headquartered DraftKings—an online sports betting and gambling company—quit his job with DraftKings and moved to California to join a California-based competitor, Fanatics (also a company that is engaged in the business of online sports betting). Hermalyn signed a one-year noncompete agreement with DraftKings, which had a Massachusetts choice of law provision. Massachusetts law allows the use of noncompetes, with some restrictions, while California law bans most noncompete agreements, regardless of where they are signed. And so the stage was set; if Massachusetts law applied, Hermalyn breached his noncompete; but if California law applied, Hermalyn’s noncompete would not be enforceable (hence the importance of which state’s law applies).

Seeking to preemptively invalidate his noncompete, Hermalyn sued DraftKings in California for declaratory relief. Days later, DraftKings sued Hermalyn in Massachusetts District Court and obtained a preliminary injunction to enforce the one-year noncompete agreement contained in his contract and prevent him from working for Fanatics until the expiration of the noncompete. In rendering its decision, the Massachusetts District Court sided with DraftKings and applied Massachusetts law. Hermalyn then appealed the Massachusetts District Court’s decision to the First Circuit Court of Appeals.

Hermalyn argued that California’s interest in not enforcing the noncompete was “materially greater” than Massachusetts’ interest in enforcing it. The First Circuit disagreed and affirmed the preliminary injunction, holding that Hermalyn’s noncompete agreement should be enforced regardless of his current California residence.

The court held that California’s interest in this dispute was not “materially greater” than Massachusetts, and therefore it would not disturb the choice of law provision in the noncompete agreement. The Court rejected Hermalyn’s argument that because he currently resides in California, which is where he allegedly breached the noncompete agreement, the reasoning in Oxford Global Resources, LLC v. Hernandez (2018), a Massachusetts state court case, should apply. In Oxford, the court held that California had a materially greater interest than Massachusetts in the dispute because the employee executed and performed the contract in California and committed a breach in California after he quit and joined a California-based competitor. The First Circuit, however, distinguished Oxford because Hermalyn primarily worked for DraftKings from the East Coast (traveling regularly to Massachusetts) and did not perform any of his work responsibilities for DraftKings from California. The Court therefore determined that the effect of any breach would have been felt by DraftKings in Massachusetts, not California. The court also found that Massachusetts had carefully considered the issue of enforcing noncompetes, as it had passed the Massachusetts Non-Competition Act, which limits the use of noncompetes (but not to the same degree as California). And further, Hermalyn did not show that California’s interest in pursuing its policy in regulating noncompetes was materially greater than Massachusetts’ interest in doing the same.

What Can Employers Takeaway From The DraftKings Case?

The DraftKings case is a great reminder of the importance of the impact of state law on the enforceability of noncompetes. Even if an employee moves to a state with employee-friendly noncompete laws, employees cannot necessarily avoid the enforceability of an otherwise lawful noncompete by relying upon the laws of another state. That concept is especially important given the nature of remote work and employee mobility in today’s workforce. Until the FTC is successful in enforcing a federal ban of noncompetes (a day that may not come any time soon, especially if the FTC appeals are unsuccessful), employers should be reviewing the noncompetes in their employees’ agreements and evaluating the enforceability of those noncompetes (and even before then, the necessity of having a noncompete in the first place) on a case-by-case basis.

If you have any questions on best practices to draft restrictive covenant agreements or defend the enforceability of your restrictive covenant agreements, please contact a member of the Kelley Drye Labor and Employment team.

In a previous article, we outlined the FTC’s Final Rule and the swift legal challenges attempting to block its implementation. In particular, we looked at a July 3, 2024 decision in Ryan LLC v. FTC, where a Texas federal court granted a motion for a preliminary injunction against the FTC’s Final Rule, and temporarily enjoined the noncompete ban from going into effect against the named plaintiff/intervenors. Although, in its initial preliminary injunction ruling, the court only blocked the September 4, 2024 implementation of the Final Rule against the plaintiff, Ryan, LLC, our article posited that the court in Ryan could issue a broader nationwide block of the FTC rule in the future.

That predication came true this past week. On August 20, 2024, the Ryan Court granted the plaintiff’s motion for summary judgment and held that the FTC’s Final Rule should not be enforced or otherwise take effect on September 4, 2024 or thereafter. With the scales of justice seemingly tipping back and forth over the legality of noncompetition clauses, we will analyze what the Ryan court said and the impact on employers moving forward.

Ryan LLC v. FTC

Following the Ryan court’s grant of a preliminary injunction, both parties submitted motions for summary judgment regarding the propriety of the FTC’s Final Rule. In the cross-summary judgment motions, the main issues in front of the court were:

(i) whether the FTC was permitted to create substantive rules regarding unfair methods of competition, and

(ii) whether the Final Rule’s sweeping prohibition was arbitrary and capricious.

With the first issue, the court focused on the statutory text of Sections 6(g) and 18 of the FTC Act, which grant the FTC some rulemaking power with respect to unfair methods of competition. In analyzing the text, the court recognized that the relevant statutory provisions lacked any language regarding the legal consequences or “penalties” for failure to confirm to the FTC’s regulations. As such, the court held that the FTC’s authority under Sections 6(g) and 18 is merely confined to “interpretive or procedural rules” and not substantive rulemaking powers (i.e., not a nationwide ban of noncompetition agreements).

The court next looked at whether the FTC’s Final Rule is arbitrary and capricious. In rejecting the Final Rule, the court highlighted the FTC’s “lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes[.]” The court noted that the FTC failed to show why such a “categorical ban” was necessary based on the evidence of how different states approached non-compete enforcement in different factual situations. The court also emphasized that the FTC outright ignored some of the benefits of noncompetition restrictions. In total, the court held that the FTC exceeded its statutory power in promulgating its Final Rule on noncompetition agreements. The court ruled that the Final Rule should not be enforced or otherwise take effect against all employers in the United States.

What Now For Employers?

The big headline from the Ryan decision is that employers no longer need to scramble by September 4, 2024 to ensure compliance with the FTC’s noncompete ban. While litigation over the FTC’s Final Rule may not be over, as challenges may continue in other jurisdictions, employers can rely on the decision in Ryan to argue that their noncompetition restrictions are not per se unenforceable.

Additionally, the legal avenues to challenge the FTC’s rule that was upheld in Texas is similar to several Supreme Court and federal court decisions undoing the Chevron Doctrine. To learn more about the growing skepticism federal courts put on administrative rulemaking and adjudicative power please see the links to our other articles below.

• How Recent Changes to Administrative Law May Alter Labor and Employment Law as We Know It: NLRB
• How Recent Changes to Administrative Law May Alter Labor and Employment Law as We Know It
• So Long, Chevron: What The Elimination Of Agency Deference Means For Employers And The Future Of Labor And Employment Law
• Not Dead Yet: Noncompetes Survive, the FTC Rule Doesn't (For Now)

Lastly, even with this win for employers, there are still several state law and state court restrictions on noncompetition restrictions that employers must be aware of. Several states have set wage limits on when an employer can restrict an employee’s ability to compete (i.e., Colorado, Illinois, Washington, Washington D.C.), and other states have outright banned non-compete restrictions in employment agreements (i.e., California, Minnesota, North Dakota and Oklahoma).

If you have any questions on best practices to draft restrictive covenant agreements or defend the enforceability of your restrictive covenant agreements, please contact a member of the Kelley Drye Labor and Employment team.

On June 28, 2024, the U.S. Supreme Court overruled Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) (Chevron). The end of Chevron means the end of decades of deference given by courts to federal agencies when an agency’s interpretation of ambiguous or silent text in a federal statute was challenged. That is a big deal. With the ushering in of Loper Bright, courts ​“may not defer to an agency interpretation of law simply because a statute is ambiguous” because courts, rather than agencies, have sole competency to resolve statutory ambiguity. Because countless statutes task federal agencies with administering and enforcing laws, issuing rules and regulations, and deciding disputes—often requiring an agency to fill in a gap or construe statutory text—the end of Chevron deference is truly a once in a generation change in law. No longer will federal agencies waltz into court with the upper hand, expecting to rely upon Chevron to carry the day. Instead, they will need to have another plan.

THE CHEVRON DOCTRINE

Since the Chevron decision in 1984, arguably one of the most influential U.S. Supreme Court decisions in history, federal agencies were given considerable latitude to interpret statutes, and challenges to those agency interpretations were difficult to prevail upon. In short, courts deferred broadly to agency expertise, and did so mechanically as a matter of course. Not surprisingly, over time, federal agencies—for example, the U.S. Equal Employment Opportunity Commission (EEOC), National Labor Relations Board (NLRB), Occupational Health and Safety Administration (OSHA), and U.S. Department of Labor (DOL)—have gotten comfortable regularly invoking the Chevron doctrine, and with great success.

Under the old Chevron guard, a challenge to an existing agency action or interpretation of law played out as follows. When an agency’s action and interpretation of a law (for example, a final rule issued by that agency) was challenged in court, the court followed a two-step analysis.

• First, the court determined ​“whether Congress has directly spoken to the precise question at issue.” If the answer was no—meaning the governing statute was ambiguous or silent—then the court would proceed to step two of the analysis: ​“whether the agency’s answer is based on a permissible construction of the statute,” later formulated as a ​“reasonableness” standard (even if the court would have reached a different conclusion). This standard made it very difficult for challenges to agency actions to prevail. Under the first step, the challenging party would have to prove that the governing statute was ​“unambiguous,” which often was not the case (for example, think about how Title VII has evolved since it was passed in 1964 and did not contemplate the nuances of a modern, evolving workplace). In other words, statutes are often ambiguous, and sometimes purposefully so.
• Moving to step two, the court would then determine ​whether the agency’s interpretation was​ ​“reasonable.” In practice, this meant that agency interpretations of law (even if they pushed the envelope of ​“reasonableness”) were typically upheld, as agencies almost always won on step two. As you can imagine, this further emboldened agencies and shaped their litigation strategies over time, as agencies knew they had a leg up in court.

LOPER BRIGHT – A GENERATIONAL CHANGE IN LAW

Then came Loper Bright, much to the chagrin of federal agencies. In a 6-3 decision across party lines, the U.S. Supreme Court held that the Administrative Procedure Act (APA) requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous. Agencies, according to the Court, ​“have no special competence at resolving statutory ambiguities. Courts do.” Going forward, courts must do what they do best and ​“use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity.” Without Chevron, no longer will courts ​“mechanically afford binding deference to agency interpretations,” bucking the decades-old trend.

The Court noted that prior decisions relying on the Chevron framework are not overturned, providing some continuity for prior holdings based on Chevron. Of course, it’s not that simple. Shortly after Loper Bright, the U.S. Supreme Court in Corner Post, Inc. v. Bd. of Governors of the Federal Reserve System, No. 22-1008 (July 1, 2024) (Corner Post) issued a decision addressing when claims brought under the APA accrue for purposes of the general six-year statute of limitations under federal law. The Court held that the limitations period for APA claims runs from the time of a plaintiff’s injury. Previously, most circuit courts had held that the limitations period for APA challenges instead began on the date of the final agency action (that is, when a regulation was issued) and without regard to when a plaintiff was injured. Now, Corner Post has breathed (even more) life into an opportunity to file challenges to agency regulations, which, as Justice Ketanji Brown Jackson noted, could cause a ​“tsunami of lawsuits.”

WHAT DOES THE END OF CHEVRON MEAN FOR EMPLOYERS, AND THE FUTURE OF LABOR AND EMPLOYMENT LAW?

What does the death of Chevron by Loper Bright mean? In its simplest form, the decision means that it will be more difficult for federal agencies to defend challenges to their regulations going forward. Agencies will increasingly be taken to task for an interpretation of law, or agency action, that strays too far from the statutory language (i.e., agencies will likely be playing defense, not offense). Now, without Chevron to fall back on, agencies will need to carefully consider the positions they take with respect to the statutes they are empowered to interpret and enforce. Undoubtedly, challengers to agency actions will point to the absence of Chevron in support of their position that an agency’s interpretation of law is unfounded (and indeed, already have).

The absence of Chevron will also likely lead to inconsistent results, as challenges to agency actions will be made across jurisdictions, with some federal courts upholding agency interpretations and others rejecting them. This will further complicate matters and pave the way for litigation to funnel to the U.S. Supreme Court. In fact, there are already a number of pending challenges to agency decisions underway, which will likely be affected by the post-Chevron world (such as the FTC’s noncompete ban, the DOL’s overtime rule, the EEOC’s final rule involving accommodations under the Pregnant Workers Fairness Act, and more). Loper Bright also comes at a time when notable changes to federal labor and employment laws are already happening, such as limits on the use of administrative proceedings (see SEC v. Jarkesy), the standard for requesting an injunction under the NLRA (see Starbucks v. McKinney), and a new framework for when employers are required to bargain with a union (see Cemex Construction Materials Pacific, LLC v. NLRB). More on these cases later.

What does the Loper Bright decision itself mean for employers? Today, nothing. Employers do not need to modify their existing policies or implement any changes to their workforce (as they would need to if the FTC’s non-compete ban goes into effect on September 4, 2024). Loper Bright was not even a case that involved labor and employment law. However, with Chevron deference eliminated, employers should be paying attention to decisions involving challenges to federal labor and employment law agency actions and thinking creatively about how Loper Bright can be an asset. Whether an employer finds itself in an administrative proceeding involving a law that is being challenged in the same (or even in a different, non-binding) jurisdiction, or a litigation in which arguments are being framed around existing agency interpretations of law, Loper Bright (and more simply, the elimination of Chevron deference that makes it more likely that an agency action or interpretation will not stand) is an important tool in the toolkit. It’s one that should not be overlooked.

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For questions and guidance about the impact of Loper Bright, please contact a member of Kelley Drye’s Labor and Employment team.

As anticipated, the Final Rule has been met with swift legal challenges attempting to block its implementation, with many questioning the FTC’s rule-making authority, and whether it would survive in the courts. To date, those legal challenges have been successful (albeit limited). On July 3, 2024, the court in Ryan LLC v. FTC granted a motion for a preliminary injunction against the FTC’s Final Rule, and temporarily enjoined the noncompete ban from going into effect against the named plaintiff/intervenors. Importantly, the court in Ryan laid out its reasoning for why the FTC’s Final Rule is likely unlawful, effectively paving the way for future legal challenges. However, the court in Ryan did not issue a nationwide injunction (meaning the Final Rule, as it stands today, is still set to take effect on September 4, 2024, for all parties not named in the Ryan action). Even still, the FTC’s Final Rule has taken a significant beating, made worse by the United States Supreme Court’s decision in Loper Bright Enters. v. Raimondo, which overturned the old reliable Chevron deference that federal agencies, like the FTC, have come to love and rely upon heavily in issuing rules and regulations based on their interpretations of existing law. Now without Chevron in its arsenal, undoubtedly it will be more difficult for federal agencies to regulate noncompete agreements (and other rules) because courts will likely (and should) yield less to administrative agencies’ interpretations of existing law.

Currently, the Final Rule will take effect on September 4th for all employers, except for the parties in the Ryan action. While this might change, and a nationwide injunction may be issued in Ryan (or in other courts), employers must be ready to implement significant changes regarding noncompetes that, if required, will undoubtedly alter the nature of their workforce and business for the foreseeable future. In this article, we demystify the Final Rule, its implications, discuss the current legal challenges and provide practical considerations for employers as they prepare for its (possible) implementation on September 4th.

WHAT DOES THE FINAL RULE MEAN FOR EMPLOYERS?

If the Final Rule goes into effect, it will broadly prohibit employers from imposing noncompetes on workers, which includes any term or condition of employment (whether written or oral) that “prohibits,” “penalizes” or “functions to prevent” a worker from seeking or accepting work or operating a business in the U.S. after their employment ends. This prohibition applies to all new noncompete clauses between employers and workers, post-the effective date of the rule, and also renders unenforceable existing noncompete clauses other than those pre-existing noncompetes for workers defined as “senior executives” (which the rule defines as a worker earning more than $151,164 who is in a “policy-making position”). Although the Final Rule does not prohibit nondisclosure agreements, or nonsolicitation agreements, these types of agreements could fall within the rule’s ban if they are “so broad and onerous” that they have “the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business.”

The Final Rule also requires employers to notify employees subject to the prohibited noncompete (i.e., except for “senior executives”) that existing noncompetes will not be, and cannot be, enforced. The FTC has also provided model language for the notice requirement. Absent a successful legal challenge (that applies to all employers, not just those named as parties to a given action), prohibiting its implementation, the Final Rule will take effect on September 4, 2024, 120 days after it was published in the Federal Register. As we discuss below, unless a nationwide injunction is issued, employers will be required to comply with the rule and should be preparing now to do so, even if the likelihood of it going into effect is increasingly becoming less likely.

LEGAL CHALLENGES TO THE FINAL RULE – RYAN LLC MAKES WAVES THIS SUMMER

Not surprisingly, it did not take long for legal challenges to the Final Rule to take fold. On April 23, 2024, hours after the Final Rule was passed, Ryan LLC filed the first lawsuit seeking to enjoin the Final Rule in federal court in the Northern District of Texas. That same day, the U.S. Chamber of Commerce (the nation’s largest business advocacy group) filed a similar lawsuit in the Eastern District of Texas seeking to do the same. Since then, another lawsuit was filed in the Eastern District of Pennsylvania (ATS Tree Services, LLC v. Federal Trade Commission et al.). Each of these lawsuits take similar form. They contend the FTC lacks authority to engage in rulemaking of substantive competition rules (i.e., prohibit noncompetes), and seek a declaratory judgment and injunctive relief to prevent the Final Rule from taking effect 120 days after its publication in the Federal Register, September 4th.

On July 3, 2024, Judge Ada Brown (a Trump appointee) in Ryan issued a blistering 33-page decision preliminary enjoining the Final Rule from taking effect on September 4, 2024; but, as noted, only with respect to the plaintiffs in the action (Ryan, LLC, the U.S. Chamber of Commerce, the Longview, Texas Chamber of Commerce, and two trade organizations). In finding that plaintiffs would likely succeed on the merits, there are several main takeaways. First, the court explained that, after reviewing the text, structure, and history of the relevant statute (the “FTC Act”), that it does not “expressly grant the [FTC] authority to promulgate substantive rules regarding unfair methods of competition.” This is a major blow to the FTC’s proffered argument that it is an unfair method of competition for persons to enter or enforce noncompete agreements, and that the powers entrusted to the FTC empower it to make substantive rules precluding unfair competition. On this basis alone, we anticipate that future legal challenges to the Final Rule will likely be successful (and indeed, the court in ATS has already relied upon the decision in Ryan).

Second, the court in Ryan went on to say that a categorical ban on nearly all noncompetes would likely be arbitrary and capricious because it is overly broad without any reasonable explanation and signaled that the Final Rule is unlikely to pass final judicial review on the merits. As explained above, the court in Ryan did not grant nationwide injunctive relief and limited its preliminary injunction and the stay of the Final Rule’s effective date to the plaintiffs before the court (which means that the Final Rule’s effective date still applies to all employers). However, the court explained that it intends to enter a merits disposition on the action on or before August 30, 2024, a decision likely to convert the preliminary injunction to permanent relief.

As if the state of the law could not get any more interesting, before the preliminary injunction decision in Ryan, SCOTUS issued a decision on June 28, 2024, in Loper Bright which, by itself, was a watershed moment in administrative law. The court in Loper Bright eliminated the agency deference afforded by step two of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. In particular, the court held that courts ​“may not defer to an agency interpretation of law simply because a statute is ambiguous” because courts, rather than agencies, have sole competency to resolve statutory ambiguity. Because countless statutes task federal agencies with administering and enforcing laws, issuing rules and regulations, and deciding disputes—often requiring an agency to fill in a gap or construe statutory text—the end of Chevron deference is a significant change in administrative law. Undoubtedly, the elimination of Chevron deference weakens the FTC’s Final Rule even further, as it deals a blow to the FTC’s broad interpretation of its rule making authority to curtail unfair competition.

But that’s not all. Before the court in Ryan enters a merits disposition on August 30th, on July 23, 2024, the court in ATS is expected to issue a decision on the plaintiff’s motion for preliminary injunction. Presiding Judge Kelley Hodge (a Biden appointee) could order a broader injunction, or a conflicting opinion to Ryan, complicating matters even further and creating more uncertainty for employers before the Final Rule’s effective date.

THE FINAL RULE’S NOTICE REQUIREMENTS

If the Final Rule stands (which it may not), it requires employers to notify non-excepted employees that existing noncompetes will not be, and cannot be, enforced. The FTC’s model language contains explicit language to this effect, and the FTC recommends that such notice be provided in multiple languages. The model language says:

A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:

• You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].

• You may run your own business—even if it competes with [EMPLOYER NAME].

• You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

As noted, the decision in Ryan (at least for now) only applies to the plaintiffs in that action, not all employers. It also remains to be seen whether a broader, or conflicting, decision will issue in ATS. While we anticipate future legal challenges will continue, employers must be ready to comply with the Final Rule if a nationwide injunction is not issued.

IF THE FINAL RULE GOES INTO EFFECT ON SEPTEMBER 4, 2024, WHAT SHOULD EMPLOYERS DO?

Assuming the Final Rule remains in effect on September 4th, employers will need to provide notice to employees of its implementation, as noted above. If that becomes the case, we recommend that employers use qualifying language in the notice to preserve its right to enforce the noncompete provisions with its employees should the Final Rule later be eliminated. An example of this language could be, as follows:

The Company is providing you with this notice to comply with the FTC’s Final Rule, to which legal challenges are pending. Should the Final Rule not remain in effect, the Company intends to enforce your noncompete provision, in accordance with applicable law.

Because the Final Rule does not require the recission of a contract with an employee, meaning that the employer would otherwise have to cancel its contract with each employee, the above language is meant to provide the employer with flexibility to enforce the noncompete provision should it be in a position to do so given the status of future legal challenges, all the while complying with existing law. Even if the Final Rule remains, there are still effective tools that employers can use to protect its confidential and proprietary information and ensure that their business interests are protected.

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For assistance in navigating the intricacies of compliance with the FTC’s Final Rule please contact Kelley Drye’s Labor and Employment team.

Companies seeking to protect their business with post-employment restrictions—in particular, noncompetes and non-solicitation agreements—face ever-increasing regulatory and legislative challenges. The Federal Trade Commission’s broad ban on noncompetes, slated to take effect on September 4, 2024, is surely the most dramatic and headline-grabbing of recent developments. However, even if the predictions that the rule won’t survive legal challenges are true, companies will still face a patchwork of state and local laws that significantly limit the use of restrictive covenants. With a one-size-fits-all approach no longer tenable, how can companies pursue the most effective strategy for protecting business information and relationships?

Topics include:

• Evolving legal trends
• The best compliance strategies
• Alternative approaches to the use of noncompete agreements

Whether you are a business owner, HR professional, legal counsel, or corporate executive, this webinar offers essential insights and actionable strategies to help you effectively navigate the evolving regulatory landscape surrounding noncompete agreements.

REGISTER HERE