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 some plaintiffs, saying the ban cannot be enforced against them pending a final decision.
But while the ruling is preliminary, she said the FTC lacked “substantial rulemaking authority” regarding unfair competition methods and that the plaintiffs “will likely 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 decision by the end of August.
The commission “stands by our clear authority, supported by statute and precedent, to issue this rule,” said Douglas Farrar, an FTC spokesman. He added that the agency will “continue to fight” against competition in an effort to promote worker mobility and economic growth.
In April, tax firm Ryan LLC sued to block the near-total ban on noncompetes, just hours after the FTC voted 3 to 2 to approve 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 prevent workers from switching jobs within an industry, would increase workers’ incomes by at least $400 billion over the next decade, the FTC estimates. The deals affect roughly one in five American 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 can work because of a lack of competition, that’s a loss for the economy,” Aviv Nevo, director of the FTC’s Bureau of Economics, said at a briefing 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 that 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 commission say 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 received some bipartisan support: Representative Matt Gaetz, R-Florida, argued in a brief filed in the Texas case that the non-compete ban falls “well within” the rulemaking authority granted to the commission by Congress.
The Supreme Court’s decision last week to limit 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 limited to plaintiffs at this stage, Judge Brown’s order was a strong indication that she would hold the FTC’s rule invalid. preventing it from taking effect nationwide. .
“The writing is on the wall there,” said Mr. Goldstein. “I have never seen a court issue a preliminary injunction and then, absent some extremely unusual circumstances, enter a final judgment that was inconsistent with the preliminary injunction.”
As litigation over the non-compete rule drags on, some lawyers are already advising employers to start relying more on various agreements to protect trade secrets and business interests.
In a blog post after the FTC adopted its noncompete ban, law firm Winston & Strawn suggested that employers adopt alternative measures, such as narrowly tailored nondisclosure agreements and requirements that employees pay the company for training costs if they leave early. a fixed period – known as training repayment agreement provisions, or TRAPs.
“The focus on these additional protections has become greater,” said Kevin Goldstein, an antitrust partner at Winston & Strawn.
But even these agreements are under increasing scrutiny. The commission’s final rule includes “de facto non-competes” — measures that, in effect, prevent a worker from changing jobs within an industry, even if they are not labeled as 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 growing.
“There’s been an increased hostility to 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 a wrongful termination case. The judge also broke new ground by banning a non-solicitation clause, which limits solicitation of customers or employees of a former employer; it argued that both types of agreements could chill protected activity, including union organizing.
That decision followed a memo last year from the labor board’s general counsel, Jennifer Abruzzo, that clarified her view 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 memo 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 contracts and employment law. “And it’s another thing to see the adjudicative side of the NLRB 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 are much greater if you can’t find another job afterward.”
Other federal agencies have also stepped in, seeing a variety of employment provisions that they argue unfairly restrict workers. It’s part of the Biden administration’s whole-of-government approach to what it considers anticompetitive restrictions on worker mobility.
The Consumer Financial Protection Bureau, for example, issued a report last summer on the dangers of provisions requiring workers to pay training costs if they quit before a certain time has passed.
It’s not just a federal push: State governments are also stepping in to promote worker mobility — a trend that was underway before the FTC voted to ban noncompetes in April, but a trend that has gained momentum since then.
Last month, Rhode Island’s legislature passed a bill to ban non-competes, joining Minnesota, California, Oklahoma and North Dakota. Dozens of other states have enacted partial restrictions.
“Minnesota didn’t turn into an open crater,” said Pat Garofalo, director of state and local policy at the American Economic Freedom Project, a progressive think tank, referring to the state’s sweeping ban on non-competes that went into effect in last. year. “Once one domino falls, a bunch of dominoes fall after.”
State laws may also prove more resilient to challenge than federal rules.
“State legislatures obviously have a lot of interest in getting these rules on the books now,” said Mr. Garofalo.