Conflicting rulings on the FTC's noncompete ban create uncertainty for family businesses

The recent Pennsylvania federal court rulings on the Federal Trade Commission’s (FTC) ban on noncompete agreements have thrown family businesses into uncharted territory. With conflicting decisions emerging from different courts, the legal landscape around noncompete clauses is more uncertain than ever, posing significant challenges for family businesses focused on succession planning and preserving business value.

The Conflicting Court Rulings

Case One: Ryan LLC v. Federal Trade Commission

On April 23, 2024, the FTC issued a Final Rule prohibiting noncompete agreements, slated to take effect on September 4, 2024. Ryan LLC, a tax services firm, quickly filed a lawsuit challenging the rule’s legality. On July 3, 2024, U.S. District Judge Ada Brown of the the Northern District of Texas granted a preliminary injunction, halting the rule’s implementation for the plaintiffs. The ruling was made final on August 20, 2024, when Judge Brown granted summary judgment to Ryan LLC, striking down the FTC’s Noncompete Rule nationwide.

Key findings from the court included:

• The FTC exceeded its statutory authority in issuing the rule.
• The rule was deemed arbitrary and capricious under the Administrative Procedure Act.
• The court rejected the FTC’s argument to limit relief to the named plaintiffs, applying the ruling nationwide.

As a result, the Noncompete Rule did not take effect on September 4, 2024, and the FTC cannot enforce it against Ryan LLC, or anyone else, due to the nationwide injunction issued by the Texas court.

Case Two: Aspen Tree Expert Co., Inc. v. Federal Trade Commission

In another twist, the U.S. District Court for the Eastern District of Pennsylvania issued a contradictory decision on July 23, 2024. Aspen Tree Expert Co., Inc. sought a preliminary injunction to block the FTC’s noncompete ban from taking effect on September 4, 2024. The court denied the request, allowing the FTC’s rule to remain on track.

The judge in this case rejected the plaintiff’s arguments that the FTC lacked authority to issue the rule and that the rule would cause irreparable harm and loss of proprietary business information. The judge also pointed out that companies could use permissible alternatives like non-disclosure agreements to protect business information.

This conflicting ruling adds to the uncertainty for employers pending any further legal developments.

Proactive Steps for Family Businesses

Given the current legal ambiguity, family businesses should adopt a proactive stance to safeguard their interests:

1. Review Existing Agreements: Conduct an audit of current noncompete agreements to ensure they comply with applicable state laws and consider updating them if necessary.
2. Tailor Agreements Carefully: Draft noncompete clauses with a narrow focus to increase enforceability, emphasizing legitimate business interests and reasonable scope and duration.
3. Consider Alternatives: Explore other protective measures like non-disclosure agreements, non-solicitation clauses or “garden leave” provisions” (an agreement in which an employee stays away from work or works remotely and stays on the payroll during the termination process and is prohibited from going to work or working for anyone else. This is more common in the UK but recent legislation has allowed the agreement in Massachusetts.)
4. Integrate with Succession Plans: Align noncompete agreements with broader succession planning goals, especially for key family members or employees transitioning to leadership roles.
5. Stay Informed: Monitor ongoing legal challenges and potential future FTC actions regarding noncompetes.
6. Consult Legal Counsel: Work with experienced attorneys to ensure noncompete agreements are properly structured and enforceable in relevant jurisdictions.
7. Focus on Retention Strategies: Develop comprehensive retention plans beyond noncompetes, including competitive compensation, professional development, and clear career paths.
8. Document Trade Secrets: Maintain thorough records of proprietary information and processes to support potential enforcement of noncompetes if needed.

While the FTC rule has been blocked for now, family business owners must remain vigilant about potential future changes in noncompete regulations at both federal and state levels. Regularly reviewing and updating employment agreements and succession plans with the help of legal counsel is advisable to ensure ongoing protection of business interests while complying with evolving laws.

By taking these steps, family businesses can better navigate the uncertain legal terrain and position themselves for long-term success in a rapidly changing regulatory environment.