September 2024 Newsletter
FTC’S BAN ON NONCOMPETES SET ASIDE
On August 20th, the U.S. District Court for the Northern District of Texas set aside the Federal Trade Commission’s (FTC’s) proposed ban on most noncompete agreements. This means the rule will not be enforced or take effect on September 4th as intended.
Judge Ada E. Brown ruled that the FTC didn’t have the power to issue the rule because Congress only authorized it to issue procedural rules to address unfair methods of competition, not substantive rules. She also found that the rule was arbitrary and capricious. Specifically, she wrote, “The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition instead of targeting specific, harmful noncompetes, renders the rule arbitrary and capricious.”
She ruled in favor of the plaintiffs in the case: tax services and software provider, Ryan LLC; the U.S. Chamber of Commerce; the Business Roundtable; the Texas Association of Business; and the Longview Chamber of Commerce. Her decision renders the injunction against the rule permanent and nationwide.
The FTC proposed the rule in April, stating that noncompete clauses suppress wages and constitute an unfair method of competition. The agency estimated that about 20% of U.S. workers (approximately 30 million people) are bound by a noncompete agreement.
The FTC’s ban would have covered all existing and new noncompete agreements for U.S. workers, with exceptions for certain industries (airlines, financial services, and nonprofits). In addition, it would have prohibited employers from creating new noncompete agreements with “senior executives,” defined as people earning more than $151,164 annually who are in a “policymaking position.”
The rule would have also required employers to provide notice to current and former workers that their noncompete clauses are no longer in effect.
Many business and employer groups opposed the rule, and lawsuits were quickly filed against the rule when it was announced. Many others filed briefs in support of delaying the rule from going into effect while litigation was ongoing.
Employers that use noncompete agreements typically cite the need to protect trade secrets and other sensitive information from rival firms looking to poach talent.
FTC spokesperson Victoria Graham said the agency was disappointed with the ruling and is “seriously considering a potential appeal.” However, the chances of success are not good. According to Jonathan Crook, an attorney in the Charlotte, N.C. office of Fisher Phillips, “Any appeal would be heard by the notoriously business-friendly 5th Circuit Court of Appeals, where the odds of the rule being resurrected are slim. And the next step after that would be a potential visit to the Supreme Court, which has taken direct aim at the regulatory state in recent years and is likely a hostile environment for any attempt by the FTC to wield such power.”
So, what does that mean for employers? With the FTC rule struck down for now, the situation has returned to the status quo. Employers can continue to have noncompete restrictions to protect key relationships and confidential information.
Employers should utilize this time to ensure their existing noncompete agreements are precisely tailored to meet the state laws in which they operate and that they are limited to critical employees.
In the wake of the district court’s decision, the FTC announced that it will continue to address noncompetes through case-by-case enforcement actions.
Employers may also want to compile an inventory of all existing restrictive covenant agreements, including those that apply to former workers. Having such an inventory could be a helpful resource for compliance and tracking purposes.