Businesses in New York, both big and small, have long utilized non-compete agreements and related restrictive covenants to prevent employees from leaving for a competitor and taking valuable information and experience with them.
New York courts have narrowed the enforceability of non-compete agreements over the years – most notably in BDO Seidman v. Hirshberg – but they are still widely utilized. However, as 2023 came to an end, employers were faced with the very real possibility that New York State and/or the Federal Trade Commission (“FTC”) would ban the use of non-competes in most circumstances.
In New York, legislation was introduced in the Assembly and State Senate that prohibited non-compete agreements in almost all circumstances. Around the same time, the FTC introduced a rule that would both prospectively and retroactively ban non-compete agreements nationwide. The rule proposed by the FTC contained more exceptions than the proposed legislation in New York, but still largely prohibited employers from entering into non-compete agreements with employees.
In late December 2023, Governor Hochul vetoed the bill banning non-compete agreements in New York. However, in an accompanying memorandum, the Governor suggested she would be amenable to a more narrowly tailored non-compete ban that struck the right balance between protecting middle and low wage earners, while still allowing employers to retain “highly compensated talent.” To date, the legislature has not acted on Governor Hochul’s invitation for a more narrowly tailored ban, but the writing may be on the wall that greater restrictions on non-compete agreements – if not an outright ban – are coming to New York.
Following Governor Hochul’s veto, the eyes of employers utilizing non-compete agreements turned to the status of the proposed FTC ban. The FTC proposal was challenged in a number of courts, but Ryan LLC v. Federal Trade Commission, venued in the Northern District of Texas, ultimately became the case to watch.
In Ryan LLC, a tax company and the U.S. Chamber of Commerce brought suit alleging the FTC’s non-compete ban exceeded its statutory authority and was arbitrary and capricious. The plaintiffs initially sought a preliminary injunction, which was granted by U.S. District Judge Ada Brown on July 3, 2024. The plaintiffs wanted the court to find that the preliminary injunction applied nationwide, but the court limited the preliminary injunction to the parties involved in that particular lawsuit.
However, plaintiffs subsequently moved for summary judgment, and in an August 20, 2024 decision, Judge Brown set aside the FTC’s non-compete rule as unlawful. The court further rejected the FTC’s argument that the relief be limited to the named plaintiffs – meaning the non-compete ban is invalid nationwide – at least pending an appeal to the Fifth Circuit.
In striking down the FTC rule, the court concluded that while the FTC has some authority to promulgate rules to include unfair methods of competition, it lacks the authority to create “substantive rules.” The court went on to state that the question is not what the FTC thinks it should do, but what Congress has said it can do, and that courts must look to what Congress explicitly gave the FTC the authority to do. Using this framework, Judge Brown concluded that Congress did not explicitly give the FTC the ability to engage in substantive rule-making such as a nationwide ban on non-competes.
The court went on to find that the FTC rule was arbitrary and capricious in that it was “unreasonably overbroad without a reasonable explanation.” It explained:
“The rule imposes a one-size fits all approach with no end date, which failed to establish a rational connection between the facts found and the choice made.”
The court also found it notable that no state has enacted a non-compete rule as broad as the FTC’s rule, and that the evidence submitted by the FTC in opposition to the motion for summary judgment comparing different state’s approaches to enforcing non-competes based on specific factual situations, was completely inapposite to the FTC’s imposition of a categorical ban.
As noted above, the ruling in Ryan LLC may be appealed by the FTC to the U.S. Court of Appeals or the Fifth Circuit. However, the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, overruling the deference courts afford to a federal agency’s interpretation of its own power (known as “Chevron deference”), complicates an appeal by the FTC. Put simply, an appeal by the FTC faces a tougher road in the aftermath of the Loper Bright decision.
Currently, the practical effect of Governor Hochul’s veto and the decision from the Northern District of Texas invalidating the FTC non-compete ban is to maintain the status quo for employers in New York for the time being. However, given Governor Hochul’s openness to a more narrowly tailored non-compete ban, and the uncertainty as to what will happen in the FTC’s likely appeal, New York employers should continue to consult with employment counsel on a regular basis to stay abreast of any changes in the law.
Colin D. Ramsey is a Partner in Underberg & Kessler LLP’s Health Care, Labor & Employment, and Litigation practice groups. He defends nursing homes and medical providers against negligence and malpractice claims, municipalities against personal injury and property damage claims, and individuals and businesses in labor and employment claims.
Reprinted with permission from The Daily Record and available as a PDF file here.