FTC noncompete ban in doubt amid legal challenges
Federal district courts in Texas and Pennsylvania are reviewing the recent Federal Trade Commission (FTC) rule banning noncompete agreements that is scheduled to go into effect Sept. 4, 2024. On July 3, the Texas district court delayed the rule for the plaintiffs in the case while it considers the merits.
The rule. The rule prohibits employers from entering into new noncompetes or enforcing existing noncompetes with limited exceptions, including one for agreements entered into with senior executives before the rule’s effective date. It covers virtually all paid and unpaid workers and independent contractors who are employed by public and private companies regulated by the FTC. For a detailed discussion of the final rule, see “Federal Trade Commission bans most noncompete clauses.”
The lawsuits. In Ryan v. Federal Trade Commission, the federal district court in Texas delayed the effective date for the four plaintiffs in the case. The court found that the FTC didn’t have “substantive” rulemaking authority with respect to unfair methods of competition under the FTC Act, the plaintiffs were likely to succeed on the merits, and a categorical ban on virtually all noncompetes without a reasonable explanation and an adequate consideration of alternatives would be “arbitrary and capricious.” The court plans to decide the case on its merits by Aug. 30, with the final decision expected to apply to everyone covered by the rule. If the court vacates the rule, the FTC will likely appeal the decision to the Fifth Circuit Court of Appeals.
At the same time, the federal district court in Pennsylvania is planning to decide by July 23 about delaying the rule’s effective date to give the court time to consider the merits of the case. If the FTC loses this case, it’s likely to appeal the decision to the Third Circuit Court of Appeals.
An appeal of either decision would face headwinds given the Supreme Court’s June 28 decision (Loper Bright Enterprises v. Raimondo) that overturned the Chevron doctrine, which gave deference to federal agency interpretations of laws. And the Fifth Circuit has recently ruled against other federal agency rules.
What’s next for companies. Employers should await the outcome of the cases before taking steps to comply with the FTC rule. But, given the growing criticisms of noncompetes and the rise in the number of states that restrict or ban their use, it’s a good time to review noncompete agreements against state laws and evolving market practice, identify employees subject to noncompetes, and explore ways to strengthen covenants regarding nonsolicitation of clients and colleagues and protection of trade secrets.