Ryan sues FTC over non-compete rule

Ryan, a Dallas-based international tax firm and software provider, has filed suit against the Federal Trade Commission over the rule issued last week outlawing non-compete employment agreements. 

Ryan said its lawsuit in a federal court in Texas is the first challenge to the FTC’s action, claiming it would impose an extraordinary burden on businesses seeking to protect their intellectual property and retain top talent within the professional services industry. The firm contends the FTC’s rule would upend companies’ IP protections and talent development and retention by invalidating millions of employment contracts and nullifying the laws of dozens of states. Ryan said it tried to dissuade the FTC by submitting a 54-page public comment last spring against the FTC’s proposed rule.

“For more than three decades, Ryan has served as a champion for empowering business leaders to reinvest the tax savings our firm has recovered to transform their businesses,” said Ryan chairman and CEO G. Brint Ryan in a statement last week. “Just as Ryan ensures companies pay only the tax they owe, we stand firm in our commitment to serve the rightful interest of every company to retain its proprietary formulas for success taught in good faith to its own employees.”

Ryan contends non-compete agreements are an important tool for firms to protect their IP and foster innovation. And without such agreements, firms could hire away a competitor’s employees just to gain insights into their competitor’s intellectual property. Ryan argues that the FTC’s decision to ban an important tool for protecting IP would inhibit firms from investing in that IP in the first place and result in a less innovative economy. The firm’s complaint, filed in the U.S. District Court for the Northern District of Texas, contends the FTC lacks the authority to prohibit non-compete agreements. It also claims the FTC itself is unconstitutionally structured.  

Accounting Today asked the firm why it decided to sue the FTC over the rule. “Ryan challenged the FTC’s rule because we recognize the threat it poses to our business, our team members and our industry,” responded Ryan LLC chief legal officer John Smith in an email interview. “The FTC’s ban on non-compete agreements undermines American free enterprise, freedom of contract and the rule of law. At the core of Ryan’s mission is pushing back against government overreach in our area of expertise: taxes on businesses. Through three decades of growing into a global leader in this field, Ryan has proven its skill at such pushback for our clients. This rule reaches beyond the law to harm our own business, as well as our clients’ businesses, so pushing back here comes naturally for Ryan.

“Ryan has been repeatedly recognized both as a great provider of tax services and software, as well as a great place to work, partly because of its commitment to principles that enable entrepreneurs to thrive — investment, innovation, growth, fairness and the rule of law,” he added. “What better way to advance those principles than to stand against a ban that attacks them?”

Does Ryan have proprietary tax strategies that it seeks to safeguard? “Yes,” Smith responded. “We have honed such strategies through decades of accumulated experience, as we apply our expertise to benefit a vast array of clients in virtually every industry with a full range of tax categories.”

Ryan is concerned its employees might take away certain kinds of information with them. “There are a variety of categories of proprietary information,” said Smith. “Examples include proprietary tax-saving methodologies and strategies, and our confidential business arrangements with clients.”

Is Ryan concerned about losing clients if the non-compete agreements are nullified? “Yes,” said Smith. “If the FTC rule stands and nullifies non-compete agreements, an employee may believe they can switch to a direct competitor and take the chance that Ryan would never discover that they are exploiting our confidential and trade secret information to compete unfairly.  “Non-compete agreements fill a gap in protecting the confidential information of a business,” he added. “While a non-disclosure agreement (NDA) secures an employee’s promise not to disclose the employer’s confidential information or IP, not all employees honor NDAs, and they are hard to enforce. Ryan has learned it can be difficult and expensive to uncover breaches of NDAs, let alone litigate them. Because the competitor’s work product and that employee’s contributions to it are not visible to the original employer, the breach may remain hidden while irreversible harm occurs. By contrast, non-competes are much easier to enforce in practice since determining a violation involves straightforward, available information: what new job the former employee has taken, and what business that new employer performs.”  

What kinds of intellectual property need to be protected in the tax profession? “We need to protect the integrity and goodwill associated with our brand, our confidential information, including methodologies, strategies, formulas and compilations related to our tax business, our patented technologies and our copyrighted digital solutions,” said Smith.

Ryan’s news release refers to a “free-rider problem that inhibits firms from investing in their employees” and we asked for an explanation. “If Ryan invests in its employees (by training and empowering them with proprietary information and IP developed through company investments) but cannot protect its informational assets, then unethical competitors can ‘free ride,'” said Smith. “They can poach employees they didn’t train, exploit assets they didn’t invest in, and reap profits they didn’t earn.”