A federal judge on Wednesday upheld an initial legal challenge to the Federal Trade Commission’s ban on non-compete agreements, which is scheduled to take effect in September.
Judge Ada Brown granted an injunction sought by many plaintiffs, saying the ban cannot be enforced against them pending a final decision.
But while the decision is preliminary, he said the FTC lacked “substantial rulemaking authority” over unfair competition practices and that the plaintiffs were “likely to succeed on the merits” of their challenge.
Judge Brown, of the U.S. District Court for the Northern District of Texas, said she expects to issue a final decision by the end of August.
The commission “relies on our clear authority, supported by statute and precedent, to issue this rule,” said Douglas Farrar, a spokesman for the FTC. He added that the agency would “continue to fight” non-competes in an effort to promote worker mobility and economic growth.
In April, tax firm Ryan LLC sued to block the near-total ban on non-competes, hours after the FTC voted 3-2 to adopt the rule. The US Chamber of Commerce later joined the case as a plaintiff, as did the Business Roundtable and two Texas business groups.
Banning non-compete agreements, which prohibit workers from changing jobs within an industry, would increase workers’ earnings by at least $400 billion over the next decade, the FTC estimates. The deals affect about one in five American workers, or about 30 million people, according to the agency, whose remit includes antitrust and consumer protection issues.
“If you’re not working in the most productive space you could be working in because of non-competitiveness, that’s a loss to the economy,” Aviv Nevo, director of the FTC’s Office of Finance, said at a conference in April.
Business groups argue that the ban would limit their ability to protect trade secrets and confidential information. The Chamber of Commerce and other groups contend the FTC lacks constitutional and statutory authority to adopt its proposed rule, with Ryan LLC calling it “arbitrary, capricious and otherwise unlawful.” Another lawsuit seeking to block the rule is pending in federal court in Pennsylvania.
But the three Democrats on the five-member panel argue that it can legally issue rules defining unfair competition practices under the FTC Act of 1914, the law that created the agency. Their position has also garnered some bipartisan support: Rep. Matt Gaetz, R-Florida, argued in a brief filed in the Texas case that the noncompete ban falls “clearly” within the rulemaking authority given to the commission by the Congress.
The Supreme Court’s decision last week to limit the federal agencies’ broad regulatory power could increase the agency’s legal hurdles.
Mark Goldstein, a labor and employment attorney at Reed Smith in New York, said that while it was limited to plaintiffs at this stage, Judge Brown’s order was a strong indication that she would strike down the FTC’s rule as invalid, preventing it from being put into effect. force at national level.
“The writing is on the wall there,” Mr. Goldstein said. “I have never seen a court issue a preliminary injunction and then, absent some highly unusual circumstances, issue a final judgment that was inconsistent with the preliminary injunction.”
As disputes over the non-compete rule drag on, some lawyers are already advising employers to start relying more on different agreements to protect trade secrets and business interests.
In a blog post after the FTC adopted the non-compete ban, law firm Winston & Strawn suggested employers adopt alternative measures, such as narrowly tailored non-disclosure agreements and requirements that employees reimburse the company for training costs if they leave before from a set period — known as training repayment agreement provisions or TRAPs.
“The focus on these additional protections has become greater,” said Kevin Goldstein, antitrust partner at Winston & Strawn.
But even these deals are subject to increasing scrutiny. The committee’s final rule includes “de facto noncompetes” — measures that, in effect, prevent a worker from changing jobs within an industry, even if they are not labeled non-compete clauses. And employers are watching the changing landscape of state and federal restrictions on such agreements, including nondisclosure agreements, beyond the FTC rule.
While the Commission’s vote to ban noncompetes has garnered the most attention, moves by other federal agencies and state legislatures against agreements that restrict worker mobility are simultaneously on the rise.
“There has been increased hostility toward these deals in general, across the country,” said Christine Bestor Townsend, co-chair of the unfair competition and trade secrets practice group at Ogletree Deakins.
Last month, a National Labor Relations Board judge ruled for the first time that a non-compete clause is an unfair labor practice as part of her decision in an unfair dismissal case. The judge also broke new ground by striking down a non-solicitation clause, which limits a former employer from soliciting clients or employees. argued that both types of agreements could freeze protected activity, including union organizing.
That decision followed a memo last year from the labor board’s general counsel, Jennifer Abruzzo, clarifying her view that non-compete clauses in labor contracts violate the National Labor Relations Act, except in limited circumstances.
“It’s one thing to get a guidance note from the general counsel, which is significant and important,” said Jonathan F. Harris, an associate professor at Loyola Law School in Los Angeles who studies contract and labor law. “And it’s another thing to see the NLRB side of the judiciary agree with it.”
Those kinds of restrictive covenants tend to scare workers away from organizing, Mr. Harris said, “because the consequences of being fired for organizing become much greater if you can’t find another job afterward.”
Other federal agencies have also stepped in, monitoring a number of employment provisions they argue unfairly restrict workers. It’s part of the Biden administration’s whole-of-government approach to what it sees as anti-competitive restrictions on worker mobility.
The Consumer Financial Protection Bureau, for example, issued a report last summer on the dangers of provisions that require workers to repay training costs if they leave their jobs before a certain period of time has passed.
It’s not just a federal push: State governments are also stepping in to promote worker mobility — a trend that was in motion before the FTC voted to ban non-competes in April, but one that has gained momentum since then.
Last month, the Rhode Island legislature passed a bill to ban non-competes, joining Minnesota, California, Oklahoma and North Dakota. Dozens more states have enacted some restrictions.
“Minnesota didn’t turn into a crater,” said Pat Garofalo, director of state and local policy at the American Economic Liberties Project, a progressive think tank, referring to the state’s sweeping ban on non-competes that went into effect last year. “Once a domino falls, a bunch of dominoes fall.”
State laws can also prove more resistant to challenge than federal rules.
“State legislatures obviously have a lot of interest in getting these rules on the books right now,” Mr. Garofalo said.
