DOL SERVED A LOSS: U.S. Court of Appeals Vacates DOL 80/20/30 Tip Rule

By Michele L. Jakubs*

The Fifth Circuit Court of Appeals, in a 3-0 decision, vacated the Department of Labor’s (“DOL”) 2021 Final Rule that restricted when an employer could apply a tip credit, finding it arbitrary and capricious. Under the Fair Labor Standards Act (“FLSA”), an employer may take a tip credit, paying tipped employees at a rate below the applicable minimum wage in anticipation of tips making up the difference. In 2021, the DOL issued a Final Rule limiting when an employer could utilize the tip credit to time for work that directly produced tips (i.e., work that directly supported tips provided that work did not exceed 20% of the work time and did not exceed thirty consecutive minutes). The Fifth Circuit found that the “Final Rule is attempting to answer a question that DOL itself, not the FLSA has posed. … The FLSA does not ask whether duties composing that given occupation are themselves each individually tip-producing.”

The Fifth Circuit stated that the “Final Rule replaces the Congressionally chosen touchstone of the tip-credit analysis – the occupation – with one of DOL’s making – the timesheet,” seemingly recognizing the insurmountable burden placed on employers of parsing each minute of time worked by a tipped employee to determine its applicable category. The issue is “only whether the employee is engaged in an occupation in which he receives tips.”

The Fifth Circuit’s decision vacating the Final Rule allows employers to apply the tip credit as intended by Congress – to employees engaged in an occupation in which the employee receives tips. If the employee is performing duties unrelated to that occupation, such as a server fixing the plumbing in a restaurant, however, the employee must receive at least the full minimum wage.

*If you have questions relating to the DOL’s new rule, or any other labor and employment law issues, please contact Zashin & Rich’s Wage and Hour Practice Leader, Michele L. Jakubs (mlj@zrlaw.com) at (216) 696-4441.

UPDATE: Texas Court Prohibits Enforcement of FTC’s Non-Compete Ban Rule Nationwide

By Ami J. Patel and Kimana A. Bowen*

As you know based on our prior Alerts, the Federal Trade Commission issued a purported Rule banning employers from enforcing non-competes against “workers” with some limited exceptions. The FTC Rule was set to go into effect on September 4, 2024. However, there have been several court challenges to the FTC’s authority and the validity of the Rule.

The Texas Court Prohibits Enforcement of the Rule

On August 20, 2024, the United States District Court for the Northern District of Texas issued a decision against the FTC, prohibiting the enforcement of the FTC’s Rule—nationwide. The court agreed with the Plaintiffs in Ryan LLC, et al v. Federal Trade Commission, finding that Plaintiffs are entitled judgment on their claims under the Administrative Procedure Act (“APA”) and the Declaratory Judgment Act because: (1) the FTC lacks authority to create substantive rules; and (2) the FTC’s rule is arbitrary and capricious since it is overbroad, a one-size-fits-all, with no end date and fails to consider alternatives and the benefits of non-competes.

Because the Texas Court concluded that the FTC exceeded its statutory authority and that the FTC Rule is arbitrary and capricious, under APA § 706(2)(A)–(C), the Texas Court must “hold unlawful” and “set aside” the FTC’s Rule. According to the Texas Court, the APA has nationwide effect because it is “not party-restricted,” and “affects persons in all judicial districts equally.” As such, the Texas Court’s decision applies nationwide and is not limited to just the Plaintiffs in the Texas case.

While the September 4, 2024 effective date for the FTC Rule is set aside, we anticipate that the FTC will challenge this decision.

Florida’s Recent Ruling on the FTC Non-Compete Ban Rule

The Texas court ruling comes just days after a Florida Federal District Court also preliminarily enjoined the FTC from enforcing its Rule on non-competes against a real estate broker. The Florida Court found that the FTC will not face substantial harm if the status quo is maintained until a final decision on the Rule’s validity is made and that there was a substantial likelihood of success based on the “major questions doctrine.”

The major questions doctrine asserts that when an agency claims authority to issue rules of extraordinary economic and political significance, it must point to “clear congressional authorization” for such power. The court concluded that, given the Rule’s extensive application, including its purported application to existing contracts, it is “substantially likely that the rule presents a major question as defined by the Supreme Court.”

What Now for Employers

Sit Tight. For now, employers have a good-faith basis that the Rule will not go into effect on September 4, 2024. However, employers should use this issue as an opportunity to assess whether their current agreements protect their business, information, and interests as desired. Employers should work with experienced trade secret and non-compete lawyers to evaluate whether their workers have well-drafted agreements in place and to revise stale ones.

*Please contact Z&R’s Practice Leader of its Non-Compete/Trade Secret practice, Ami J. Patel (ajp@zrlaw.com) at 216-696-4441 or Kimana A. Bowen (kab@zrlaw.com), if you have any questions about the effect of these decisions on the FTC’s purported Non-Compete Rule or need assistance with review of your existing documents or how to draft new agreements.

A Checklist Guide for Employers on How to Prepare for the Potential Non-Compete Ban Rule by the FTC

By Ami J. Patel and Kimana Bowen*

Understand the Texas and Pennsylvania Courts’ Rulings and Their Potential Impact

• The Texas Court
  On July 3, 2024, the U.S. District Court for the Northern District of Texas granted a stay and preliminary injunction against the Federal Trade Commission’s (“FTC”) Rule banning non-competes. The court found that Ryan LLC (“Ryan”) and the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce (collectively the “Chamber”)are likely to succeed on the merits, face irreparable harm without the injunction, and that the balance of harms and public interest favor the injunction.
  
  While the FTC’s Rule is stayed for Ryan and the Chamber, the court has not blocked the Rule nationwide. A final decision on the merits is expected by August 30,2024, which may affect the scope of the injunction.
  
  Be on the lookout for our Alert on the Texas Court’s August 30thruling as it may modify this checklist.

• The Pennsylvania Court
  On July 23, 2024, the United States District Court for the Eastern District of Pennsylvania declined to issue a preliminary injunction enjoining the Federal Trade Commission (“FTC”) from enforcing its Rule banning non-competes. The court found that ATS Tree Services, LLC failed to prove irreparable harm or likelihood of success on the merits.

Know What the Final Rule Requires

The final Rule will invalidate all non-compete clauses for workers who are not senior executives. Existing non-competes for senior executives will remain in effect, but employers cannot require new non-competes for senior executives after the Rule’s effective date. The Rule prohibits:

1. Entering into or attempting to require an employee to enter into a non-compete clause.
2. Enforcing or attempting to enforce a non-compete clause.
3. Representing that a worker is subject to a non-compete clause.

• Non-Compete Clause
  The Rule defines a “non-compete clause” as “a term or condition of employment that prohibits worker from, penalizes a worker for, or functions to prevent a worker from:

1. seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
2. operating a business in the United States after the conclusion of the employment that includes the term or condition.”

A “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

The final Rule defines “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status” under any other state or federal law.

Accordingly, “worker” includes employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide services to a person.

Know the Exceptions to the Rule

The FTC Rule has the following exceptions:

Bona fide sales of business. The Rule (ban) does not apply to a noncompete clause that is “entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

Existing causes of action. The Rule (ban) does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date.”

Good faith. The Rule (ban) does not apply “where a person has a good-faith basis to believe that the Rule is inapplicable.”

Review your contracts with non-competes and the existing status of the cases to determine if any of these exceptions apply.

Continue to Enforce Existing Non-Competes with Senior Executives

Even if enforced, the FTC Rule permits enforcement of current non-competes with senior executives. The final Rule defines “senior executive” as “a worker who:

• Was in a policy-making position; and
• Received for employment:

1. a total annual compensation of at least $151,164 in the preceding year; or
2. a total compensation of at least $151,154 when annualized if the worker was employed during only part of the preceding year; or
3. a total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.”

Consider Non-Solicitation and Non-Disclosure/Confidentiality Agreements

As the FTC’s Rule is litigated and set to take effect on September 4, 2024, employers should review their employee contracts and consider the benefits of using or revising non-solicitation and confidentiality provisions to protect their legitimate business interests and their confidential, proprietary and trade secret business information.

• Non-Solicitation Agreements
  An effectively drafted non-solicitation agreement can successfully prevent former employees from soliciting current employees and customers after leaving the company. Such agreements must be reasonable and narrowly tailored to protect legitimate business interests. Review your current agreements to determine if they remain valid under the new Rule and to ensure that they effectively protect your business.
  
  
• Non-Disclosure/Confidentiality Agreements
  Non-Disclosure/Confidentiality Agreements are contracts or provisions where a current or former employees agree not to disclose certain types of valuable business information. Review your current agreements to determine if they remain valid under the new Rule and to ensure that they effectively protect your confidential and valuable business information.
  
  

Consider Drafting Notices (but hold off on sending them out)

The Rule requires employers to notify non-senior executive workers with existing non-competes that their non-competes are no longer enforceable.

The final Rule includes a model for employers to use to draft compliant notices. The model notice from the FTC advises employers to inform employees of the following: (1) they may seek or accept a job with any company or any person - even if they compete with the employer; (2) they may run their own business - even if it competes with the employer; and, (3) they may compete with the employer following their employment.

The final Rule also requires that the notice provide the following: (1) the name the person who agreed to the non-compete clause with the worker, and (2) a notice on paper by hand to the worker, or sent by mail to the worker’s last known personal street address, or emailed to an address belonging to the worker, including the worker’s current work email address or last known personal email address, or texted to a mobile number belonging to the worker.

While employers should assess and identify which employees should receive these notices, employers should wait on sending those notices due to the ongoing litigation, which could significantly impact the Rule’s enforceability.

First, as previously stated, one of the exceptions to the final Rule is having a good-faith basis to believe that the Rule is inapplicable. There is a split in the Federal Circuit Courts between Pennsylvania, Texas, and potentially others. Accordingly, if the employer is similarly situated to the Texas Plaintiffs and has a good-faith belief that the Texas Court ruling is the correct interpretation of the law, then the exception could apply. In that scenario, the employer could have a defense to enforcement of the FTC Rule and its notice requirements.

Second, with the Circuit split and the upcoming election, there is a real possibility that the final Rule may be rendered unconstitutional or eliminated.

Continue to Monitor the Alerts from Z&R

As the situation continues to evolve, employers should familiarize themselves with the moving parts, this Checklist, and begin identifying the employees and agreements subject to the potential Rule (ban of non-competes). Once identified, employers should evaluate what types of protections are in the employer’s best interest. While the FTC’s new Rule has been enjoined from enforcement (in one Court) and its validity continues to be litigated, employers should prepare but continue to wait for further guidance as this matter develops. Continue to stay tuned and Z&R will update you.

*Please contact ZR’s Practice Leader of its Non-Compete/Trade Secret practice, Ami J. Patel (ajp@zrlaw.com) at 216-696-4441 or Kimana Bowen (kab@zrlaw.com) if you have any questions about any of the items on the check list regarding the FTC’s new Non-Compete Rule or need assistance with review of your existing and new agreements.

UPDATE: The Court Enjoins the FTC From Enforcing The Non-Compete Ban. We Told You Not To Panic!

By Ami J. Patel* and Kimana Bowen

On July 3, 2024, the United States District Court for the Northern District of Texas, Dallas Division, partially granted a stay and preliminary injunction against the Federal Trade Commission’s (“FTC’s”) rule banning non-competes. The court found that Ryan LLC(“Ryan”) and Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce (collectively the “Chamber”) are likely to succeed on the merits, will suffer irreparable harm without the injunction, and that the balance of harms and public interest favors granting the injunction.

Likelihood of Success on the Merits

While the court’s injunction is not a final decision, the court gave us a preview of the grounds under which it asserts that Ryan and the Chamber will succeed on the merits. First, the court found that the FTC lacks statutory authority to enforce the rule. Although the FTC can create rules concerning unfair methods of competition, the court concluded that the FTC, under Section 6(g) of Federal Trade Commission Act, can only create "housekeeping," procedural rules, not substantive ones as it tried to do here.

Additionally, the court found that the FTC's actions likely violated the Administrative Procedure Act (APA), which requires courts to set aside agency actions deemed arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law. Ultimately, the court found that Ryan and the Chamber will likely be able to demonstrate that the FTC's rule is overly broad, lacks a reasonable explanation, and imposes a “one-size-fits-all” approach without addressing alternatives, making it arbitrary and capricious.

Irreparable Harm and Public Interest

The court also determined that Ryan and the Chamber were able to articulate irreparable harm if an injunction was not granted. In particular, the court found that the nonrecoverable costs of complying with the FTC rule, which it determined will likely be invalidated, are irreparable.

The court asserts that granting the preliminary injunction serves the public interest by maintaining the status quo and preventing substantial economic impact, while inflicting no harm on the FTC. The FTC rule, if enforced, would make long-standing contractual agreements, recognized as beneficial to the public interest, unenforceable.

What’s Next for Employers?

The September 4,2024 effective date of the FTC’s non-compete rule is stayed, and the FTC is enjoined from implementing or enforcing its non-compete rule against Ryan and the Chamber. The court intends to issue a merits disposition on this action on or before August 30, 2024, and it is unclear if that ruling will block the FTC rule nationwide or continue to be limited to Ryan and the Chamber. There are other challenges to the FTC rule that will be decided soon.

As the situation continues to evolve, do not panic. While the FTC’s new rule has been enjoined from enforcement and its legitimacy is being litigated, employers should wait for further guidance as this matter develops. Continue to stay tuned and Z&R will continue to update you.

*Please contact ZR’s Practice Leader of its Non-Compete/Trade Secret practice, Ami J. Patel (ajp@zrlaw.com) at 216-696-4441 if you have questions relating to the FTC’s new Non-Compete Rule and need assistance with review of your existing agreements.

Supreme Court Rules Traditional Preliminary Injunction Test Applies to NLRA Section10(j) Injunctions

By George S. Crisci and Rebecca Singer-Miller*

Section 10(j) of the National Labor Relations Act (the “Act”) authorizes the National Labor Relations Board (the “NLRB”) to seek injunctive relief in federal district court against Charged Parties to stop alleged unfair labor practices while the case is being litigated at the administrative level. Under Section 10(j), a federal district court“ shall have jurisdiction to grant to the Board such temporary relief or restraining order as it deems just and proper.” A well-known instance when the NLRB seeks a Section 10(j) injunction involves reinstating a former employee allegedly unlawfully discharged during the pendency of unfair labor practice proceedings before an administrative law judge or the NLRB.

For many years, the NLRB has asserted that to obtain a Section 10(j) injunction it need only establish that: (1) there was reasonable cause to believe that unfair labor practices have occurred; and (2) injunctive relief was just and proper. Some federal appellate courts – including the Sixth Circuit Court of Appeals (whose jurisdiction includes Ohio) – have adopted this deferential standard. Other federal appellate courts, however, have required the NLRB to satisfy the stricter, traditional elements for obtaining a preliminary injunction.

On June 13,2024, the U.S. Supreme Court confirmed that the traditional four-factor preliminary injunction test applies to Section 10(j) injunctions. The Court’s decision in Starbucks Corp. v. McKinney, No. 23-367, 602 U.S. ____ (2024) resolves a circuit split as to the standard controlling the NLRB’s Section 10(j) injunction petitions. The Supreme Court’s majority opinion confirmed that, when seeking a Section 10(j) injunction, the NLRB must show by clear and convincing evidence that: (1) it is likely to succeed on the merits;(2) it is likely to suffer irreparable harm in the absences of preliminary relief; (3) the balance of equities tips in its favor; and (4) that an injunction is in the public interest.

The underlying dispute arose when several Starbucks employees invited local media to visit their Memphis, Tennessee store after hours to promote the employees’ union organization efforts. Starbucks then terminated their employment for violating company policy. The Union coordinating the Memphis store’s organization efforts filed an unfair labor practice charge with the NLRB. After the NLRB’s investigation, it issued a complaint against Starbucks and filed a Section 10(j) petition. The district court granted the injunction, and the Sixth Circuit affirmed. The injunction, among other things, required Starbucks to reinstate the terminated employees while the unfair labor practice charge against Starbucks remained pending.

The Supreme Court noted that the standard asserted by the NLRB and adopted by the Sixth Circuit is quite deferential the to the NLRB—it could establish" reasonable cause” simply by showing that its legal theory is substantial and not frivolous, and it could show relief is “just and proper” if it is necessary to return the parties to the status quo pending the Board’s proceedings so as to protect the Board’s remedial powers under the NLRA. The Supreme Court added that the Sixth Circuit’s standard “substantially lowers” the NLRB’s legal burden when it seeks a Section 10(j) injunction. Indeed, “it is hard to imagine how the Board could lose under the reasonable-cause test if courts deferentially ask only whether the Board offered a minimally plausible legal theory” while an evaluating District Court ignores conflicting laws or facts and fails to examine whether the NLRB’s theory is likely meritorious.

The Supreme Court recognized that there are circumstances where the four-factor test is not the applicable standard, but only when Congress declares so by statute. Section 10(j) lacks any specific instruction suggesting that Congress “altered the traditional equitable rules.”

This is the sticking point of the majority’s decision—Section 10(j) contains no language that could be interpreted as modifying the traditional injunction standard. Accordingly, the Court held that the traditional four factors apply when considering the NLRB’s request for a Section 10(j) injunction.

McKinney’s Practical Implications

1. Agency Deference May Be Dwindling

McKinney suggests that administrative agencies, such as the NLRB, may be afforded less deference as to their interpretations of statutes. As discussed, perhaps the most important consideration when assessing the applicable injunction standard under Section10(j) was what Congress did not say. Section 10(j) itself contains no language that adopts a different standard than the traditional four-factor test.

This reasoning is reminiscent of Encino Motorcars, LLC v. Navarro, 584 U.S. 79 (2018), wherein the Court rejected the Department of Labor’s narrow construction of the FLSA in applying the overtime exemptions to service advisors within the vehicle repair industry. The Court explained: “Because the FLSA gives no ‘textual indication’ that its exemptions should be construed narrowly, ‘there is no reason to give [them] anything other than a fair (rather than a ‘narrow’) interpretation.”

The Court’s similar reasoning in McKinney may be indicative of its forthcoming decision in Relentless Inc. v. Department of Commerce, which could step away from the Chevron doctrine and further limit agency deference. In sum, these decisions remind the NLRB that it must rely on statutory text itself, rather than an overarching purpose of the statutory scheme, to support its interpretation.

2. Employers Have Multiple Grounds to Challenge Employee Reinstatement

McKinney is significant in the employee reinstatement context. The NLRB’s injunction in McKinney required, among other things, reinstatement of the terminated employees while the NLRB’s administrative complaint against Starbucks remained pending. Because the Sixth Circuit’s “reasonable cause” test was so deferential to the NLRB’s assessment of the facts and circumstances, injunctions requiring employee reinstatement were harder for employers to oppose. And, even if the NLRB or the courts later deemed the employer’s terminations to be lawful, the employer would still incur damage by reinstating and compensating a lawfully-terminated employee until the NLRB or the courts rendered that decision.

These circumstances are less likely to occur under the traditional four-factor test. Employers can challenge reinstatement on three of the four grounds. First, District Courts must examine the likelihood of the NLRB’s success on the merits. This means that employers can challenge the NLRB’s position and potentially avoid reinstating employees where the NLRB has not met its burden as to its legal theory underlying the Section 10(j) injunction.

Second, employers can challenge reinstatement on the basis of irreparable harm. Courts have declined to adopt prior NLRB arguments that irreparable harm will occur if an employee is not reinstated because other make-whole remedies exist, such as monetary remedies (including, but not limited to, back pay), which undermine the NLRB’s position when it seeks reinstatement. The NLRB has increasingly fashioned additional monetary remedies for employees where it finds employers committed violations. As such, employers can argue that irreparable harm will not occur if the employee is not, in fact, reinstated.

Third, employers may present evidence that reinstatement fails the “balance of equities” or the“ public interest” factors. Employers could present evidence that reinstatement of a particular employee would be harmful to the workplace overall, thus rendering the NLRB’s argument for reinstatement inequitable overall. For example, say an employee was fired for creating a hostile work environment in violation of company policy and another employment statute, but the NLRB challenged the termination on the basis that the behavior was protected activity under Section 7. Even though the behavior was arguably protected activity, reinstating the employee would still have a damaging effect on the work environment as a whole. Employers could argue that the NLRB’s remedy of reinstatement would be grossly inequitable for the employer, and therefore, the “balance of equities” would not be in the NLRB’s favor.

Closing Thoughts

Although the NLRB now operates under a more exacting standard to obtain a Section 10(j)injunction, in no way does this invite employers to violate the NLRA and other applicable laws. Employers (including non-union employers) must continue to abide by the NLRA and be mindful of employee rights under Section 7. The NLRB may still obtain a Section 10(j) injunction if it meets the four criteria. But the impact of the injunction on employers may change based on the application of the four-factor test. Employers are strongly encouraged to maintain relationships with qualified labor and employment counsel to navigate active and potential complaints and injunction petitions by the NLRB.

*Please contact ZR Team Members George S. Crisci (gsc@zrlaw.com) and Rebecca Singer-Miller (rsm@zrlaw.com) for questions relating to Section 10(j) injunctions and other labor-related matters.

UPDATE: The FTC’s Non-Compete Rule Faces Another Lawsuit and Added Pressure. Remember, DO NOT panic!

By Ami J. Patel*

In our previous Alert, we discussed two pending lawsuits against the Federal Trade Commission(“FTC”) regarding its new non-compete ban rule. The Final Rule was published in the Federal Register on May 7, 2024, and is set to go into effect on September 4, 2024. However, as of May 9, 2024, the U.S. District Court for The Northern District of Texas Dallas Division granted the United States Chamber of Commerce, Texas Association of Business, and Longview Chamber of Commerce the right to intervene as Plaintiffs in Ryan LLC’s case against the FTC. The Court found it necessary to allow intervention because the Chamber’s interest may be inadequately represented by Ryan alone and the two separately-filed lawsuits share a common question of law or fact.

As a result, the Court in Texas expects to issue a decision on whether it will preliminarily stop enforcement of the FTC’s Non-Compete Rule, by July 3, 2024.

In addition to the case in Texas, there is another case pending in the U.S. Court for the Eastern District of Pennsylvania. In that case, ATS Tree Services, LLC (“ATS”), a tree service company, seeks both a preliminary and permanent injunction to prohibit the enforcement of the FTC’s Final Rule and to set it aside completely. ATS asserts similar arguments made by the U.S. Chamber and Ryan, LLC about the importance of non-competes. Accordingly, there is the potential for a split between the Circuits now that litigation exists in two different Circuits which could potentially create an issue for the United States Supreme Court to review.

So What Now for Employers?

As stated before, do not panic. While the legitimacy of the FTC’s new rule is being litigated and still not in effect, employers do NOT need to make any changes and should wait for further guidance as this matter develops. Continue to stay tuned and Z&R will continue to update you.

*Please contact ZR’s Practice Leader of its Non-Compete/Trade Secret practice, Ami J. Patel (ajp@zrlaw.com) at 216-696-4441 if you have questions relating to the FTC’s new Non-Compete Rule and need assistance with review of your existing agreements.

The FTC Faces Lawsuit From The Chamber of Commerce and Others Following The Passage of Its Purported New Non-Compete Ban Rule

By Ami J. Patel*

On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to pass a new rule that virtually bans all non-compete clauses as were ported in a prior Alert. The two dissenting Commissioners asserted that the FTC does not have the power to pass this new rule and anticipated litigation has followed based on that very assertion.

On April 24, 2024, the United States Chamber of Commerce filed a lawsuit which challenged the FTC’s authority. The Chamber filed a Complaint in the United States District Court Eastern Division of Texas against the FTC and Lina Khan in her official capacity as Chair of the FTC. The Chamber was joined by three other business groups: the Longview Chamber of Commerce, the Business Roundtable, and the Texas Association of Business.

The Chamber’s complaint is based on several assertions:

1. the Commission does not have the substantive rulemaking authority under Sections 5 and 6 of the Federal Trade Commission Act to enact this rule;
2. this enactment is based on an unlawful interpretation of “unfair methods of competition”;
3. the regulation constitutes unconstitutional delegation of Congressional rulemaking authority;
4. this regulation creates a form of unlawful retroactivity;
5. the FTC failed to engage in “Reasoned Decision Making” as required by the Administrative Procedure Act (“APA”), and;
6. the FTC failed to consider alternative proposals.

The Chamber has also filed a Motion of Stay and Preliminary Injunction to stop enforcement of the FTC’s new rule while the Court considers the merits of the Chamber’s claims. The FTC has until May 15, 2024 (21 days) to respond to the Chamber’s Complaint and Motion to Stay. After the Chamber’s opportunity to respond, the Court should determine whether to enjoin the FTC’s rule while the Court decides the merits of the Chamber’s case.

Another lawsuit has been filed by Ryan, a tax services and software firm, asserting that the new rule places a tremendous burden on companies looking to maintain top people in the professional services sectors and safeguard their intellectual property (IP). Ryan aims to stop what it believes are unjustified restrictions that the FTC's regulation would have on service-oriented businesses across the country, regardless of size. We anticipate many more lawsuits to come challenging the FTC’s new rule.

What Now For Employers?

As we stated in a prior alert, Employers should not panic! Employers should continue to assess their current use of non-competes, non-solicitation provisions, and non-disclosure agreements to identify changes, adjustments, and notices. However, employers do NOT need to make any changes as of now. Stay tuned and we will update you on any future developments on this matter.

*Please contact ZR’s Practice Leader of its Non-Compete/Trade Secret practice, Ami J. Patel (ajp@zrlaw.com) at 216-696-4441 if you have questions relating to the FTC’s new Non-Compete Rule and need assistance with review of your existing agreements.