Proposed FTC Ban on Non-Competes: What Texas Business Owners Need to Know

As the public comment on the proposed FTC ban on non-competes nears, it’s a good time to look at how Texas businesses could be impacted. Here’s a look at what’s occurred so far and what’s ahead.

The proposed rule, announced by the FTC in January, would generally ban the practice of non-compete agreements by making it illegal for an employer to enter these agreements, maintain existing agreements, and/or represent to a worker that they are subject to a non-compete.

Subsequently, the U.S. Chamber of Commerce threatened legal action if the proposed rule moves forward, calling it “blatantly unlawful”. Aside from making it harder for employers to protect a company’s confidential information and intellectual property, a non-compete ban would result in a variety of challenges related to hiring and investing in workers.

It could take as long as a year for the FTC to finalize the proposed rule, and even longer as the decision faces legal action. Public comment on the issue will close on April 19.

California, North Dakota, and Oklahoma already ban non-competes for the most part. Meanwhile, Washington, Colorado, Illinois, Arizona, and Nevada have restrictions that render many of their non-competes void.

The Current Landscape of Non-Competes in Texas

In Texas, non-competition agreements have long been a contentious area of litigation. The time and expense associated with these types of lawsuits is often surpassed only by the confusion for many employers and employees regarding the proper scope, limitations, and enforceability of such agreements.

For a Texas non-compete agreement to be enforceable, it must meet certain requirements. These requirements include:

• The non-compete must be ancillary to an otherwise enforceable agreement.
• The non-compete must be reasonable in terms of its geographic scope, duration and the scope of the activities restricted.
• The non-compete must be supported by valid consideration, such as the provision of confidential information, specialized training or access to customers or trade secrets.
• The non-compete must not be against public policy, which means that it must not be designed to restrict competition or harm the public interest.

If a non-compete agreement meets these requirements, it may be enforced by a Texas court. However, whether or not a specific non-compete agreement is enforceable depends on the specific facts and circumstances of each case.

The Impact of a Non-Compete Ban in Texas

While the proposed ban’s impact would span most industries, the healthcare and oil and gas sectors in particular face unprecedented disruption. Healthcare workers could be more likely to switch employers or start their own practices. Large hospital systems could lose the ability to prevent employees from working for competitors.

In the oil and gas industry, companies may be more vulnerable to losing specialized employees to competitors. The industry may need to find alternative methods to protect confidential information and trade secrets.

What Texas Employers Can Do Now

While nobody knows what the outcome will be at this time, there are steps Texas employers can take now to be prepared. If the non-compete ban becomes reality, employers will need to review and revise their current employment agreements to remove non-compete provisions. They may need to consider alternative methods of protecting their intellectual property and confidential information, such as by using non-disclosure or confidentiality agreements.

It may be necessary to revise your hiring practices to ensure that you are attracting and retaining the best employees, even without the use of non-compete agreements. Finally, Texas business owners will need to stay up to date on any changes to federal or state laws regarding non-compete agreements and adjust their practices accordingly.