Court Blocks FTC Non-Compete Rule From Going into Effect

The Federal Trade Commission proposed a rule in January 2023 that would have made most non-compete agreements unenforceable.  The FTC argued that non-competes stifle competition, limit employee mobility, and suppress wages.  The rule would have allowed employees freedom to work in cities and towns of their choosing.

The FTC rule was set to go into effect this September of this year.  However, due to a new court ruling, the prohibition on non-competes will not be going into effect.

What are Non-Competes?

As most readers of this article are likely intimately familiar with, non-competes are one type of what lawyers call restrictive covenants.  They prohibit employees from joining, owning, or operating a competitive practice within a certain geographic radius.

As Oregon law currently stands, non-competes have significant restrictions.  In order to be enforceable, employers must jump through a number of hoops, including:

• Sending proper notice to employees before they start working about the need to sign a non-compete;
• Limiting the non-compete to a “reasonable” geographic restriction. For example, that geographic radius may be five miles or less in downtown Portland but 25 miles in John Day or rural Oregon.  Specialists will likely have a larger geographic scope than general dentists;
• Limiting the non-compete period to 12 months (although older non-competes could have been longer and still been valid);
• Be a white-collar exempt employee;
• Meeting a compensation test that adjusts each year (currently set at just over $100,000 per year); and
• Providing notice to employees upon termination that they have a non-compete and that the employer intends to enforce it (again, for older agreements, this may not be a requirement).

Oregon law also allows restrictive covenants that would prohibit the employee from soliciting or serving patients or hiring the practice’s employees away.  These kind of restrictions would have been largely enforceable even under the FTC’s proposed rule.

Court Injunctive Relief

Several cases were filed around the country asking federal courts to prevent the rule from going into effect.  A case filed in Teas by a coalition of business groups, including the U.S. Chamber of Commerce, the plaintiffs argued that the FTC’s rule was an unprecedented expansion of regulatory power and violated the Administrative Procedure Act. They sought a preliminary injunction to prevent the rule from taking effect while the case was being litigated.

In August 2024, the federal court granted the injunction, effectively halting the implementation of the non-compete rule. The court ruled that the plaintiffs had raised serious questions about the legality of the FTC’s action and that there was a substantial likelihood that they would succeed on the merits. The injunction prevents the FTC from enforcing the rule until the court reaches a final decision on the matter.

What’s Next for the Case

A preliminary injunction is not a permanent ban on enforcement.  However, it is a strong statement that the court did not believe that the FTC could regulate non-competes as it had proposed.

The FTC can continue the case to trial or appeal the decision.  As the time of this writing, the FTC has not announced whether it wants to continue litigating this case.  Even if it does, the injunction will likely hold until all appeals are exhausted.  And, if eventually appealed to the US Supreme Court, it seems unlikely that this Court would rule in favor of the FTC.

Most likely, the FTC will either have to go back to the drawing board to draft a narrower rule or push to get new federal legislation passed that restricts non-competes or grants the agency that authority.  As things currently sit in Congress, this kind of legislation would not only be highly controversial, but also unlikely to pass.

Impact on Oregon Dentists

Most employed dentists in Oregon have a non-compete agreement.  Even after the FTC’s rule was announced, most dental practices still had associates sign non-compete agreements since the expectation amongst most attorneys tracking this issue (including yours truly) was just this result.

In short, practices that have jumped through all the right hoops to enter into an enforceable non-compete will be able to enforce those clauses – again, assuming they continue to meet all notice requirements.

NLRB Efforts on Non-Competes

It is important to note that while the FTC may have lost this battle (and maybe the war?), the National Labor Relations Board has expressed interest in regulating non-competes and expressed doubts about the validity of many non-competes.  While their efforts may not have an impact on professionals, we will have to wait for more guidance from them about what kinds of restrictions they plan to put on non-competes.

Conclusion

This ruling has maintained the status quo in Oregon.  Oregon remains a difficult state to get and enforce non-compete agreements.  The future of the FTC’s efforts to quash non-competes will heavily depend on the outcome of the upcoming election.

Conversations about non-competes continue to take place on a national level. No doubt those conversations will ripple into discussions within the Oregon Legislature as well.  Saalfeld Griggs will continue to provide news about this important topic.

David Briggs is a partner in the Employment Law & Litigation practice group. 

The information in this article is not intended to provide legal advice. For professional consultation, please contact Saalfeld Griggs PC at (503) 399-1070 or visit www.sglaw.com. © 2024 Saalfeld Griggs PC