A federal judge on Wednesday backed an initial legal challenge to the Federal Trade Commission's ban on non-compete agreements, which is set to take effect in September.
Judge Ada Brown granted the injunction requested by several plaintiffs, saying the ban could not be enforced against them until a final judgment was reached.
Although the decision is preliminary, he said the FTC lacks “substantial rulemaking authority” regarding unfair methods of competition and that the plaintiffs are “likely to succeed on the merits” of their challenge.
Judge Brown of the US District Court for the Northern District of Texas said she expected to issue a final ruling by the end of August.
“The Commission stands by its clear authority, backed by statute and precedent, to issue this rule,” FTC spokesman Douglas Farrar said, adding that the agency “will continue to fight” against non-competes in an effort to promote worker mobility and economic growth.
In April, tax firm Ryan LLC filed suit to block a nearly total ban on noncompetes, just hours after the FTC's order. The vote to adopt the rule was 3 to 2.The US Chamber of Commerce later joined the case as a plaintiff, as well as the Business Roundtable and two Texas business groups.
The FTC estimates that banning non-compete agreements, which prevent workers from changing jobs within an industry, would increase workers' incomes by at least $400 billion over the next decade. These agreements affect about one in five U.S. workers, or about 30 million people, according to the agency, whose scope includes antitrust and consumer protection issues.
“If you're not working in the most productive place you could be working because of a non-compete, that's a loss to the economy,” Aviv Nevo, director of the FTC's economics bureau, said at a conference in April.
Business groups argue the ban would limit their ability to protect trade secrets and confidential information. The Chamber of Commerce and other groups say the FTC lacks the constitutional and statutory authority to adopt its proposed rule, calling it “arbitrary, capricious and otherwise unlawful,” Ryan LLC said. Another lawsuit seeking to block the rule is pending in federal court in Pennsylvania.
But the three Democrats on the five-member commission say it can legally issue rules defining unfair methods of competition under the FTC Act of 1914, the law that created the agency. Their position also has some bipartisan support: Rep. Matt Gaetz, a Republican from Florida, argued in a brief filed in the Texas case that the non-compete restriction falls “fully within” the rulemaking authority granted to the commission by Congress.
of the Supreme Court Decision taken last week Limiting the broad regulatory power of federal agencies could increase legal hurdles for the agency.
As litigation over non-compete rules drags on, some attorneys are already advising employers to begin relying more heavily on a variety of 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 that employers adopt alternative measures, such as narrowly tailored non-disclosure agreements and a requirement that employees repay the company for training costs if they leave the company before a certain period of time – known as a training repayment agreement provision, or TRAP.
“The focus has become more on these additional protections,” said Kevin Goldstein, an antitrust partner at Winston & Strawn.
But those agreements are also under increasing scrutiny. The Commission's final rule covers “de facto non-competes” — measures that actually prevent an employee from changing jobs within an industry, even if they are not labeled as non-compete clauses. And employers are keeping an eye on the changing landscape of state and federal restrictions on such contracts, including non-disclosure agreements, beyond the FTC's rule.
While the commission’s vote to ban noncompetes has attracted the most attention, moves are underway by other federal agencies and state legislatures against agreements that restrict worker mobility.
“There’s been a general increase in hostility toward these agreements 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, which was part of his decision in an unfair-termination case. The judge also broke new ground by striking down a non-solicitation clause that prohibits soliciting a former employer's customers or employees; he argued that both types of agreements could prevent protected activity, including union organizing.
This decision is the following Memorandum Last year, Labor Board General Counsel Jennifer Abruzzo wrote a letter clarifying that non-compete provisions in employment contracts violate the National Labor Relations Act, except in limited circumstances.
“It’s one thing to get a guidance memorandum from the general counsel, which is important and significant,” said Jonathan F. Harris, an associate professor at Loyola Law School in Los Angeles who studies contracts and employment law. “And it’s another thing to see that the adjudicative side of the NLRB agrees with it.”
Such restrictive covenants drive workers away from labor organizations, Mr. Harris said, “because the consequences of firing you are much more severe for the organization if you can't find another job.”
Other federal agencies have jumped in, too, and are taking a closer look at employment provisions that they argue unfairly hinder workers. It’s part of a whole-of-government approach by the Biden administration to what it calls anti-competitive restrictions on worker mobility.
For example, the Consumer Financial Protection Bureau, released a report A report last summer highlighted the dangers of a provision that requires employees to repay training costs if they leave a job before a certain period of time.
It’s not just a federal effort: State governments are also stepping up to promote worker mobility — a trend that was underway before the FTC voted to ban non-competes in April but has picked up speed since then.
Last month, the Rhode Island Legislature passed a bill to ban non-competes, following suit in Minnesota, California, Oklahoma and North Dakota. Dozens more states have enacted partial bans.
“Minnesota hasn’t turned into a giant pothole,” 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 noncompetes that went into effect last year. “Once one domino falls, many other dominoes fall after that.”
State laws may also prove more resilient to challenges than federal rules.
“State legislatures are clearly very interested in enacting these rules right now,” Mr. Garofalo said.