Texas Employers are Fighting Back (and winning)

Federal Trade Commission: Non-Compete Clause Rule

I. CASE LAW UPDATE

1.     Introduction

         The legal battle between Ryan LLC and the Federal Trade Commission (FTC) over the Non-Compete Rule exemplifies a significant intersection of administrative law, competition law, and employment law. This article examines the court's Memorandum Opinion and Order in Ryan LLC, et al. v. FTC and analyzes the implications of the FTC's Non-Compete Rule.

2.     Case Background

         Ryan LLC, along with several business organizations, initiated a lawsuit against the FTC to challenge its newly promulgated Non-Compete Rule, set to take effect on September 4, 2024. The plaintiffs sought a stay of the rule’s effective date and a preliminary injunction to prevent its enforcement, arguing that the rule exceeds the FTC’s statutory authority, violates constitutional principles, and is arbitrary and capricious under the Administrative Procedure Act (“APA”).

      States have typically regulated non-competes through case law or statutes. See, e.g., Marsh USA Inc. v. Cook, 354 S.W.3d 764, 771 (Tex. 2011) (“[R]easonable non[-] compete clauses in contracts pertaining to employment are not considered to be contrary to public policy as constituting an invalid restraint of trade[.] Texas courts have enforced reasonable covenants not to compete dating back at least to 1899.”).

3.     Legal Standards for Preliminary Injunction

         The court's decision to grant or deny a preliminary injunction hinges on four factors:

·  Likelihood of Success on the Merits: The plaintiffs must show a substantial likelihood of prevailing on their claims.

·  Irreparable Harm: The plaintiffs must demonstrate that they are likely to suffer irreparable harm in the absence of preliminary relief.

·  Balance of Equities: The court must determine whether the balance of hardships tips in favor of the plaintiffs.

·  Public Interest: The injunction must serve the public interest .

4.     Arguments and Court's Analysis

·  Likelihood of Success on the Merits:

o   Statutory Authority: Ryan LLC contended that the FTC lacked the statutory authority to issue the Non-Compete Rule under Section 5 of the FTC Act. The FTC argued that non-compete clauses are "unfair methods of competition" and thus fall within its regulatory purview. The court examined whether the FTC's interpretation of its rulemaking authority was reasonable. “The Court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g). See generally 15 U.S.C. § 46(g); 15 U.S.C. § 57a. Thus, when considering the text, Section 6(g) specifically, the Court concludes the Commission has exceeded its statutory authority in promulgating the Non-Compete Rule, and thus Plaintiffs are likely to succeed on the merits.” Ryan LLC et al. v.  Federal Trade Commission, Civil Action No. 3:24-CV-00986-E, *15 (2023).

o   Constitutionality: The plaintiffs also challenged the rule on constitutional grounds, claiming that it represented an overreach of executive power. The court assessed whether the rulemaking process adhered to constitutional requirements, and found that the FTC had exceeded its statutory authority.

o   Arbitrary and Capricious: Under the APA, the plaintiffs argued that the FTC's rulemaking process was flawed, lacking sufficient evidence and rationale to support the sweeping ban on non-compete agreements . The court found that the rule is broad-sweeping and overly expansive, and that the rule prohibits essentially all non-competes rather than targeting specific and particularly harmful non-competes. Additionally, the court found that the FTC failed to adequately address alternatives to issuing the rule. The court found that the rule was arbitrary and capricious based on the foregoing points, coupled with the FTC’s failure to provide an explanation.

·  Irreparable Harm: The plaintiffs argued that the rule would cause immediate and irreparable harm by invalidating existing non-compete agreements and preventing the formation of new ones. The court considered the financial and operational impacts on businesses, including potential competitive disadvantages and loss of proprietary information.

·  Balance of Equities: The court weighed the potential harms to the plaintiffs against the FTC's interest in enforcing its rule. The plaintiffs argued that maintaining the status quo until a final decision on the merits would prevent unnecessary disruption to their business operations.

·  Public Interest: The court evaluated whether an injunction would benefit the public by preventing potentially unlawful agency action. The plaintiffs argued that the public interest favored halting the rule's implementation pending a thorough judicial review. Granting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC. Ryan LLC et al. v.  Federal Trade Commission, Civil Action No. 3:24-CV-00986-E, *28 (2023) (citing Exhibitors Poster Exch., Inc. v. Nat’l Screen Serv. Corp., 441 F.2d 560, 561 (5th Cir. 1971) (“The purpose of a preliminary injunction is to preserve the status quo and thus prevent irreparable harm until the respective rights of the parties can be ascertained during a trial on the merits.”)).

5.     Court's Decision

         The court granted the plaintiffs’ motion for a preliminary injunction, finding that they had demonstrated a substantial likelihood of success on the merits, particularly regarding the FTC’s statutory authority and the potential for irreparable harm. The court concluded that the balance of equities and the public interest also favored granting the injunction, thereby preserving the status quo until the court could issue a final ruling on the legality of the Non-Compete Rule. The court limited the scope of the injunctive relief to the Plaintiff, Ryan LLC, and the Plaintiff-Intervenors, Chamber of Commerce of the United States of America; Business Roundtable; Texas Association of Business; and Longview Chamber of Commerce.

6.     Implications and Analysis

         The court's decision to grant a preliminary injunction against the FTC's Non-Compete Rule highlights several critical issues:

·  Scope of FTC Authority: The case underscores the ongoing debate over the limits of the FTC's regulatory authority, particularly in areas traditionally governed by state law.

·  Impact on Employers and Employees: The rule, if upheld, could significantly alter the landscape of employment contracts, affecting the enforceability of non-compete clauses and potentially reshaping business practices across various industries.

·  Judicial Oversight of Agency Actions: The case exemplifies the role of the judiciary in reviewing and potentially curbing agency actions that may exceed statutory or constitutional bounds.

7.     Conclusion

         The preliminary injunction against the FTC's Non-Compete Rule in Ryan LLC v. FTC represents a pivotal moment in administrative and employment law. The case will likely set important precedents regarding the FTC's authority and the regulation of non-compete agreements, with far-reaching implications for businesses and employees alike. As the litigation progresses, the final outcome will be closely watched by legal practitioners, policymakers, and stakeholders in the business community. However, based on the court’s analysis and reasoning, it is likely that the rule will be permanently enjoined in its August 2024 decision.

II. RECAP OF THE RULE

1.     Who the Rule Affects

         The rule affects employers and employees across various industries within the United States. It specifically targets the use of non-compete clauses in employment contracts which restrict employees from working for competitors or starting their own businesses in the same field after leaving a job.

·  General Workers: The rule broadly affects all workers, which includes employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service.

·  Senior Executives: A specific subset of workers termed "senior executives" is also affected but under different conditions. A "senior executive" is defined as someone who was in a policy-making position and received total annual compensation of at least $151,164.00 in the preceding year.

2.     Effects of the Rule

         The rule prohibits the use of non-compete clauses in employment contracts. The rule defines “non-compete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” § 910.1. The rule further provides that, for purposes of the final rule, “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral. Id. The final rule further defines “employment” as “work for a person.” Id.

         This is expected to increase labor market mobility, allowing employees to move freely between jobs without restrictions. Employers will need to find alternative methods to protect their trade secrets and investments in employee training. Specifically, the rule bans employers from entering into, attempting to enter into, or maintaining non-compete clauses with workers. This means:

·      Employers cannot restrict former employees from working for competitors or starting a competing business.

·      Employers must rescind existing non-compete clauses and inform employees that such clauses are no longer in effect.

         The rule does not limit enforcement of state laws that restrict non-competes, provided that the state laws do not conflict with the rule, but the rule will preempt conflicting state laws regarding non-competes.

3.     Purpose of the Rule

         The primary purpose of the rule is to enhance competition in the labor market by removing barriers to employee mobility. The FTC believes that non-compete clauses stifle innovation, reduce wages, and limit the ability of workers to pursue better job opportunities. The rule is intended to:

·  Increase workers' freedom to change jobs and negotiate better terms with new employers.

·  Promote innovation and entrepreneurship by allowing individuals to start their own businesses without fear of legal repercussions.

4.     Exceptions to the Rule

         The rule does not apply to certain high-level executives who may continue to be subject to non-compete clauses. This exception recognizes the significant investments companies make in their senior executives and the potential risks involved in their departure to competitors. The rule also does not apply to non-compete agreements between buyers and sellers in the sale of a business, provided the individual restricted by the clause is a significant owner or holds a major interest in the business being sold.

5.     Retroactivity

         The rule allows existing non-competes with senior executives to remain in force. For workers who are not senior executives, existing non-competes are no longer enforceable after the rule’s effective date. Employers must provide such workers with existing non-competes notice that they are no longer enforceable.

6.     Penalties for Violations

         The FTC cannot obtain civil penalties or other monetary relief against parties for using an unfair method of competition, although it can obtain civil penalties in court if a party is ordered to cease and desist from a violation and fails to do so. Additionally, the FTC typically has enforcement mechanisms that may include adjudication, injunctions, and other legal actions to ensure compliance. State laws prohibiting non-competes may impose fines or civil penalties.

7.     Enforcement Mechanisms

         The FTC will enforce the rule using its existing regulatory framework. This includes monitoring compliance, investigating complaints, and taking legal action against employers who violate the rule. The rule relies on existing legal structures for enforcement, similar to how other FTC regulations are upheld.

8.     Potential Issues with the Rule

         Several potential issues with the rule have been raised:

·  Adequacy of Alternative Protections: Some commenters argue that alternatives to non-compete clauses, such as NDAs and trade secret laws, may not provide sufficient protection for employers.

·  Economic Impact: There are concerns about the economic impact on businesses that rely heavily on non-compete clauses to protect their investments and confidential information.

·  Enforceability: The rule's effectiveness may be challenged by the enforceability of other protective measures like NDAs, which are considered less predictable compared to non-compete clauses.

·  Impact on Innovation and Investment: While the rule aims to foster innovation, some argue that it may have the opposite effect by reducing the incentives for employers to invest in employee training and development.

         In conclusion, the FTC's non-compete rule represents a significant shift in employment law aimed at increasing labor mobility and market competition. While the rule addresses many concerns about the restrictive nature of non-compete clauses, it also raises questions about the adequacy of alternative protections for businesses and the broader economic implications.

When a contractor breaches a residential construction contract, homeowners typically have several remedies available to seek redress for the harm or losses suffered due to the breach. The specific remedies may depend on the terms of the contract, applicable laws, and the nature of the breach. Here are common remedies available to homeowners:

1. Damages:

• Compensatory Damages: Homeowners may be entitled to compensatory damages, which aim to compensate them for the financial losses resulting from the breach. This may include the cost of correcting defects, completing unfinished work, and any other direct financial losses.

• Consequential Damages: Homeowners may also seek consequential damages, which are losses that are not a direct result of the breach but are foreseeable consequences of the breach.

2. Specific Performance:

• In cases where monetary damages are insufficient to fully remedy the breach, homeowners may seek specific performance. This remedy compels the contractor to fulfill the terms of the contract as originally agreed, typically by completing the construction work as specified.

3. Rescission of the Contract:

• Homeowners may seek rescission of the contract, effectively voiding the agreement. This remedy is typically pursued when the breach is fundamental, and continuing with the contract would be impractical or inequitable.

4. Termination of the Contract:

• Homeowners may have the right to terminate the contract if the breach is substantial. This allows them to discontinue the relationship with the breaching contractor and potentially hire another contractor to complete the project.

5. Withholding Payment:

• If the breach is related to incomplete or substandard work, homeowners may be entitled to withhold payment until the issues are resolved or the work is completed to their satisfaction.

6. Mechanic's Liens:

• Contractors may place mechanic's liens on the property if they are not paid for their services. However, if the breach is on the part of the contractor, homeowners may be able to challenge or contest such liens.

7. Performance Bonds and Surety Bonds:

• If the contractor provided performance bonds or surety bonds, homeowners can seek compensation from these bonds to cover the costs of completing the project or addressing defects resulting from the breach.

8. Legal Action:

• Homeowners may choose to file a lawsuit against the breaching contractor to recover damages. Legal action may involve litigation, mediation, or arbitration, depending on the dispute resolution mechanism specified in the contract.

9. Insurance Claims:

• Homeowners may explore the possibility of filing claims with their insurance provider if the breach results in damage that is covered by their homeowner's insurance policy.

Residential construction projects in Texas come with inherent risks, and to ensure homeowners are shielded from unscrupulous practices, the state has implemented robust legal frameworks. This article explores the Residential Construction Liability Act (RCLA) and the Texas Deceptive Trade Practices-Consumer Protection Act (DTPA) and their crucial roles in protecting homeowners during the construction process. From implied warranties to deceptive trade practices, this analysis provides an in-depth understanding of the safeguards these laws afford to homeowners in the Lone Star State.

I. Introduction

Residential construction projects are significant investments, and the RCLA and DTPA serve as crucial legal tools to protect homeowners from potential pitfalls. This section introduces the RCLA and DTPA, highlighting their importance in establishing a fair and balanced legal framework for residential construction projects in Texas.

II. Residential Construction Liability Act (RCLA)

A. Implied Warranties under RCLA

The Residential Construction Liability Act (RCLA) in Texas establishes implied warranties to protect homeowners from construction defects and ensure the quality of residential construction projects. These warranties provide homeowners with specific rights and remedies when defects arise in the construction of their homes. Here are the key implied warranties under the RCLA:

1. Implied Warranty of Good Workmanship:

The RCLA implies a warranty that the construction will be performed in a good and workmanlike manner.

• This warranty ensures that the work performed by the contractor and subcontractors will meet the generally accepted standards of the construction industry.

• If defects arise due to poor workmanship, the homeowner may be entitled to remedies, such as repairs or compensation for the cost of correcting the defects.

2. Implied Warranty of Habitability:

The RCLA implies a warranty that the constructed residence is habitable.

• This warranty extends beyond the completion of construction to cover a reasonable time after the homeowner takes possession of the property.

• It ensures that the home is suitable for living and complies with applicable building codes and standards.

• If defects affecting habitability arise, the homeowner may have the right to seek remedies, including repairs or compensation for the diminished value of the property.

3. Statutory Definition of "Residence":

The RCLA provides a statutory definition of "residence" to clarify the scope of the implied warranties.

• "Residence" is defined broadly and includes a single-family house, duplex, triplex, or quadruplex.

• The implied warranties apply to new construction, a repair or addition to an existing residence, and a repair or remodeling of an appurtenance to a residence.

4. Limitations on Implied Warranties:

In Centex Homes, the Texas Supreme Court discusses how the implied warranty of good workmanship and the implied warranty of habitability are two distinct warranties in Texas. “The implied warranty of good workmanship focuses on the builder's conduct, while the implied warranty of habitability focuses on the state of the completed structure.  Through the implied warranty of good workmanship, the common law recognizes that a new home builder should perform with at least a minimal standard of care.” Centex Homes and Centex Real Estate v. Buecher, 95 S.W.3d 266, 272-73 (Tex. 2003).

The Court goes on to say that the implied warranty of habitability focuses more on the results, i.e., the finished product. “This implied warranty is more limited in scope, protecting the purchaser only from those defects that undermine the very basis of the bargain.  It requires the builder to provide a house that is safe, sanitary, and otherwise fit for human habitation.  In other words, this implied warranty only protects new home buyers from conditions that are so defective that the property is unsuitable for its intended use as a home.” Id. at 273. The Court held that while the implied warranty of habitability can only be waived by homeowners in very limited and narrow circumstances, the implied warranty of good and workmanlike construction can be disclaimed by the homeowners, provided that the construction contract details how the work is going to be performed. If the residential construction contract “sufficiently describes the manner, performance, or quality of construction, the express agreement may supersede the implied warranty of good workmanship.” Id. at 268.

Understanding these implied warranties is crucial for homeowners facing construction defects. If defects are discovered, homeowners should follow the procedural requirements outlined in the RCLA, including providing notice to the contractor and allowing for an opportunity to inspect and repair the defects before pursuing legal action.

B. Procedural Requirements and Statute of Limitations

The Residential Construction Liability Act (RCLA) in Texas imposes specific procedural requirements that homeowners must adhere to when asserting claims related to construction defects. These requirements are in place to ensure fair and timely resolution of disputes and to provide contractors with notice and an opportunity to address alleged defects. Here is an overview of the procedural requirements under the RCLA:

1. Notice of Claim:

• Before filing a lawsuit under the RCLA, the homeowner must first provide written notice to the contractor.

• The notice must detail the specific construction defects and the nature of the damages or losses incurred by the homeowner.

• The notice should be sent by certified mail, return receipt requested, or by another form of delivery that provides evidence of receipt.

(a) Before the 60th day preceding the date a claimant seeking from a contractor damages or other relief arising from a construction defect initiates an action, the claimant shall give written notice by certified mail, return receipt requested, to the contractor, at the contractor's last known address, specifying in reasonable detail the construction defects that are the subject of the complaint. The claimant shall provide to the contractor any evidence that depicts the nature and cause of the defect and the nature and extent of repairs necessary to remedy the defect, including any expert reports, photographs, and video or audio recordings, if that evidence would be discoverable under Rule 192, Texas Rules of Civil Procedure.

Tex. Prop. Code § 27.004.

2. Opportunity to Inspect:

• After the contractor receives notice, they have 35 days to inspect the property, up to three times.

• The homeowner must provide the contractor with a reasonable opportunity to inspect the property and address the issues raised in the notice.

3. Reinspection and Notice of Intent to Repair:

• If the initial inspection does not resolve the issues, the contractor may request a reinspection, up to three times.

• After reinspection, the contractor has the option to submit a written offer to repair the defects, settle the claim, or deny the claim. The contractor has 60 days from the date they received notice to make a written settlement offer.

• If the contractor offers to repair the defects, the homeowner must allow a reasonable time for the repairs to be completed.

4. Acceptance or Rejection of Repair Offer:

• If the contractor offers to repair the defects, the homeowner has the option to accept or reject the offer.

• If the offer is accepted, the contractor is obligated to complete the repairs within a reasonable time.

• If the offer is rejected or if the repairs are not completed as agreed, the homeowner may proceed with legal action.

5. Statute of Limitations:

• The homeowner must file a lawsuit within the time frame specified by the statute of limitations.

• The RCLA sets a two-year statute of limitations for negligence, negligent misrepresentation, and product claims. The RCLA has four-year statute of limitations for breach of contract and breach of warranty. The clock on the statute of limitations usually begins to tick when the homeowner discovers, or should have discovered, the breach.

It's crucial for homeowners to meticulously follow these procedural requirements outlined in the RCLA to preserve their rights and maximize the likelihood of a successful resolution to their claims. Failure to adhere to these procedures may impact the homeowner's ability to pursue legal remedies under the RCLA.

III. Texas Deceptive Trade Practices-Consumer Protection Act (DTPA)

A. Prohibited Practices under DTPA

The Texas Deceptive Trade Practices-Consumer Protection Act (DTPA) provides protections for consumers, including homeowners involved in residential construction projects. The DTPA serves as a powerful tool against deceptive trade practices in the residential construction industry and prohibits various deceptive trade practices in the context of residential construction. Here are some of the prohibited practices under the DTPA relevant to residential construction projects:

1. False, Misleading, or Deceptive Acts or Practices:

The DTPA prohibits any false, misleading, or deceptive acts or practices in the conduct of trade or commerce. Contractors must not engage in misrepresentations regarding the quality, characteristics, or benefits of their services or the materials used in construction.

2. Unconscionable Acts or Practices:

Unconscionable acts or practices that take advantage of a consumer's lack of knowledge or bargaining power are prohibited. Contractors must avoid taking unfair advantage of homeowners through oppressive or one-sided contractual terms.

3. False Representations:

Making false representations concerning the reasons for, existence of, or amounts of price reductions is a prohibited practice. Contractors must provide accurate information about costs, discounts, and any other financial aspects of the construction project.

4. Breach of Warranty:

The DTPA prohibits contractors from breaching express or implied warranties. Contractors are expected to fulfill the promises and assurances made regarding the quality and performance of the construction services and materials.

5. Failure to Disclose Information:

The failure to disclose information concerning goods or services that may impact the consumer's decision is considered a deceptive trade practice. Contractors should be transparent about relevant information related to the construction project, including potential risks or defects.

6. Misrepresentations of Fact:

The DTPA prohibits contractors from making false or misleading statements of fact concerning the need for parts, replacement, or repair services. Misrepresentations related to the necessity of additional work or services can be considered a deceptive trade practice.

7. Violation of Specific Statutory Provisions:

The DTPA incorporates various specific statutory provisions related to deceptive trade practices, and contractors must comply with these provisions. For example, misrepresentations related to the builder's identity, status, or experience may violate specific provisions of the DTPA.

8. Unauthorized Use of a Consumer's Name or Likeness:

Contractors are prohibited from using a consumer's name or likeness in connection with the contractor's commercial activities without the consumer's consent.

9. False Advertising:

False or misleading advertising, including deceptive claims about the characteristics or benefits of construction services, is considered a violation of the DTPA.

Homeowners who believe they have been subjected to deceptive trade practices under the DTPA may have grounds for legal action. The DTPA provides remedies for consumers who have been harmed by prohibited practices, including potential recovery of damages and attorney's fees.

IV. Overlapping Protections: RCLA and DTPA

The Residential Construction Liability Act (RCLA) and the Texas Deceptive Trade Practices-Consumer Protection Act (DTPA) are two separate statutes that provide distinct protections for homeowners in residential construction projects. However, there are instances where the protections offered by these statutes overlap, allowing homeowners to pursue claims under both acts for certain violations. Here is an overview of the overlapping protections for homeowners under the RCLA and the DTPA:

1. Implied Warranties:

Both the RCLA and the DTPA address implied warranties in the context of residential construction.

• The RCLA establishes implied warranties of good workmanship and habitability.

• The DTPA, allows consumers to assert causes of action for breach of implied warranties and prohibits deceptive trade practices, including false representations or breaches of warranties.

2. Deceptive Trade Practices:

• The DTPA provides a broader framework for addressing deceptive trade practices in consumer transactions, including residential construction.

• If a contractor engages in deceptive practices, such as false advertising or misrepresentations, homeowners may have overlapping claims under both the RCLA and the DTPA.

3. Notice and Opportunity to Repair:

• The RCLA requires homeowners to provide notice and an opportunity for the contractor to inspect and repair construction defects before filing a lawsuit.

• The DTPA also requires consumers to provide written notice before filing a lawsuit under the DTPA.

4. Statutory Damages:

• Both statutes provide for the recovery of damages by homeowners for violations.

• The RCLA allows homeowners to recover actual damages, and in certain cases, statutory damages.

• The DTPA permits recovery of actual damages, statutory damages, and, if a violation is found to be knowing, treble damages.

5. Attorney's Fees:

• Both the RCLA and the DTPA allow prevailing homeowners to recover attorney's fees.

• This provision encourages homeowners to pursue legal action when their rights under these statutes are violated.

6. Unconscionable Acts:

• The DTPA prohibits unconscionable acts or practices, which may overlap with claims under the RCLA if a contractor's conduct is deemed unfair or oppressive.

7. Breach of Express Warranty:

• The DTPA covers deceptive trade practices, including breaches of express warranties made by contractors.

• If a contractor fails to fulfill promises made in the construction contract, homeowners may have claims under both statutes.

While there is potential for overlapping protections, it's important to note that each statute has its own unique elements and requirements. Homeowners should consult with legal professionals experienced in construction law to assess their specific circumstances and determine the most effective legal strategies. An attorney can provide guidance on which claims to pursue under the RCLA, the DTPA, or both, based on the facts of the case.

V. Conclusion

In conclusion, the RCLA and DTPA collectively create a comprehensive legal framework designed to protect homeowners in residential construction projects in Texas. By establishing implied warranties, regulating deceptive trade practices, and providing legal remedies, these statutes empower homeowners to navigate construction-related disputes and uphold their rights in the pursuit of a safe and satisfactory home. This article aims to equip homeowners, legal professionals, and industry stakeholders with the knowledge needed to understand and leverage the protections offered by the RCLA and DTPA in the dynamic landscape of residential construction in Texas.