As an update, on August 20, a motion for summary judgment order was issued in a case challenging the FTC’s rule on noncompete agreements — effectively blocking the rule from taking effect for now. The court held that the FTC lacked the congressional authority to issue substantive rules related to unfair methods of competition. The FTC has indicated they are seriously considering appealing the judgment, which we expect them to do.

As the legal atmosphere surrounding noncompete agreements continues to shift, employers should continue to stay informed and reassess their current noncompete agreements. While the ultimate fate of the FTC’s noncompete rule may depend on the Supreme Court, the current administration has other mechanisms—as discussed above—to pursue and discourage broad noncompete agreements.  

Originally published in the July 2024 edition of the Dallas Bar Association's Headnotes publication

By Brandon Maxey and Kyle Yaptangco

For decades, one of Texas’s most litigated employment-related issues has been noncompete agreements and restrictive covenants. Like other jurisdictions, Texas law on the subject has evolved to consider two seemingly competing interests: the rights of workers to engage in free trade and the interests of employers who spend considerable resources recruiting and training their employees. For a while, the result has been a system in which the reasonableness and enforceability of such agreements are incredibly fact-specific and thus are the source of a litany of litigation. With recent actions from the federal government, however, the future viability of these agreements in the employment context is in doubt.

The Latest Actions on Noncompetes

In April 2024, the FTC voted 3-2 to issue a final rule that generally prohibits the use and enforcement of noncompete agreements for employers under its jurisdiction. The FTC estimates the “ban” will affect up to one in five American workers—given the broad use of the workplace agreements and the FTC’s vast jurisdiction. The rule not only prohibits any new and existing noncompete agreements but also applies retroactively, potentially changing the employment landscape for many.

The FTC rule preempts conflicting state laws, therefore banning any lawful employee noncompete clauses, but there is a “grandfathering” exemption for existing noncompetes involving senior executives, defined to include very high-level, policy-creating officers who earn more than $151,164 annually, and a separate exemption for noncompetes arising from the sale of a business. The rule further requires businesses to send a notice to affected employees before the current effective rule date of September 4, 2024.

Multiple lawsuits have been filed to block the rule, including one by the U.S. Chamber of Commerce who argues the FTC lacks the authority to issue binding regulations related to unfair methods of competition. But regardless of whether the rule survives these legal challenges, federal agencies have made their position on broad noncompete agreements clear.

In May 2023, the General Counsel for the National Labor Relations Board released a memorandum concluding that noncompete agreements violated, with few exceptions, the National Labor Relations Act. See Memorandum 23-08, Noncompete Agreements that Violate the National Labor Relations Act (May 30, 2023). The memorandum identified arguably protected activities that are “chilled” by overbroad noncompetes, including employees’ right to concertedly seek employment elsewhere or solicit coworkers to go a competitor to obtain better working conditions.

In short, the federal agency vested with the authority to enforce the NLRA and employees’ right to engage in concerted activity has detailed at least an informal policy that views noncompete agreements—at least those they view as overly broad—as a violation of the NLRA.

While the full implications of these actions are unclear, the impact is being felt in Dallas-related litigation. For example, as publicized in the Washington Post in September 2023, a noncompete battle recently broke out between former hosts of a local sportstalk show, The Hangzone, on the radio station KTCK The Ticket and the station’s parent company, over the former hosts’ new podcast The Dumbzone. Although the litigants eventually resolved the lawsuit filed by the station’s parent company, the NLRB is apparently still considering a charge filed by the former hosts based on the 2023 memorandum’s positions. Any formal action by the NLRB could have wide-ranging implications for employers moving forward.

Practical Considerations for Employers

Neither of these actions, however, generally invalidates any policies or agreements businesses have regarding their trade secrets. Thus, the Texas Uniform Trade Secrets Act continues to provide businesses with protection against unfair competition—i.e., where former employees unfairly use a former employer’s trade secrets in competition.

Employers should, therefore, review their nondisclosure policies on true trade secret information, confirm their employees’ understanding of those policies, and inform the employees of their continuing obligations to keep those trade secrets confidential upon departure. Where possible, for example, employers should consider expressly providing policies in their handbooks and employment agreements regarding the return of all confidential trade secret information upon their exit— and address with any such employees during the departure process.

Employers should revisit policies related to the treatment of sensitive and confidential information, such as (1) identifying what documents are marked confidential; (2) limiting access to the confidential information, including implementing physical and technological safeguards; (3) engaging in periodic review of their confidential information, including who has access to the information; and (4) engineering an employee culture that values confidentiality. Employers should also revisit their technology policies regarding the dissemination of sensitive and confidential information through employees’ personal devices or emails.

In short, given the current environment, employers should focus efforts on safeguarding confidential information vital to their businesses.