Earlier this year, the FTC issued new rules prohibiting non-compete clauses in nearly all employment contracts. The FTC’s rules changed the nature and scope of covenants not to compete as they apply to broadcasters and all businesses throughout the United States. The FTC found that using covenants not to compete is an unfair method of competition. The rules were to go into effect on September 4th. However, the implementation of the rules is now blocked by court order.
New Contracts: Post-term non-competes entered into, on, or after the effective date were to be banned as violating the FTC Act. This applied to all contracts.
Existing Contracts: For existing contracts with post-term non-competes (entered into before the effective date):
Senior executives – existing non-compete provisions can remain in force.
All other workers – covenants are not enforceable.
In New York, post-term covenants in employee contracts have been prohibited since 2008. However, stations may use these post-term covenants only with respect to managerial positions (See NY Law Section 202K). Thus, the real impact of the FTC regulations would be its impact on managerial employment contracts.
Last week, a Federal District Court in Texas issued a preliminary injunction in Ryan v. FTC, holding that: 1) the FTC lacked authority to issue these regulations, and 2) the regulations were arbitrary and capricious. Earlier, a similar case in Pennsylvania reached a different conclusion.
Most legal authorities believe the Texas case effectively blocks the FTC from enforcing the new rules throughout the country. Nonetheless, the New York law is still on the books.
The impact of this decision on stations in New York is as follows:
Because employee post-term covenants not to compete were already prohibited in New York, they remain prohibited. Thus, there is no impact.
Management contracts that may include a covenant not to compete will now remain in effect. Stations may continue to use a covenant not to compete for managerial, (not employee) employment contracts.
Employers do not have to send out notices to employees by September 4th.
The last bullet is important. The FTC’s rules would have required employers to notify all employees that covenants not to compete provisions were prohibited by September 4th. Given the Texas court decision and its nationwide implications, most lawyers believe there is no need to send out a notice.
This issue is not over, as the FTC may appeal the decision. It also mentioned potentially enforcing on an individual case-by-case approach. For now, the FTC’s rule will not go into effect. We urge you to consult with your own labor counsel on this issue.
You can see a brief legal memo from the law firm of Wilmer Hale here.
A discussion of the case from the law firm Gibson Dunn can be found here
The text of the Texas Cour’s Decision in Ryan v. FTC can be found here.
You can see our previous story outlining the FTC’s rule here.
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