Judge upholds FTC’s objection to non-compete ban, at least for now

A federal judge on Wednesday ruled in favor of an initial legal challenge to the Federal Trade Commission’s ban on non-compete agreements, which is expected to take effect in September.

Judge Ada Brown issued an injunction sought by several plaintiffs, stating that the ban cannot be enforced against them until a final judgment is issued.

But while the ruling is preliminary, she said the FTC had no “substantive regulatory authority” over unfair competitive practices and that the plaintiffs would “likely succeed on the merits” of their challenge.

Judge Brown of the U.S. District Court for the Northern District of Texas said she expected to issue a final ruling by the end of August.

The commission “stands behind our clear authority, supported by statute and precedent, to issue this rule,” said Douglas Farrar, an FTC spokesman, adding that the agency “will continue to fight” against noncompete agreements in an effort to promote worker mobility and economic growth.

In April, the tax firm Ryan LLC filed a lawsuit seeking to block the nearly total ban on noncompete agreements, just hours after the FTC adopted the rule in a 3-2 vote. The U.S. Chamber of Commerce later joined as a plaintiff in the case, as did the Business Roundtable and two Texas business groups.

Banning noncompete agreements, which prevent workers from moving between jobs within an industry, would increase worker earnings by at least $400 billion over the next decade, the FTC estimates. The agreements affect about one in five U.S. workers, or about 30 million people, according to the agency, which includes antitrust and consumer protection issues.

“If you’re not working at the most productive place you could be because of a noncompete agreement, that’s a loss to the economy,” Aviv Nevo, director of the FTC’s Bureau of Economics, 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 argue that the FTC lacks constitutional and statutory authority to adopt the 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 argue that they can legally issue rules defining unfair competition practices under the FTC Act of 1914, the law that created the agency. Their position has also attracted some bipartisan support: Rep. Matt Gaetz, Republican of Florida, argued in a brief filed in the Texas case that the non-compete ban falls “squarely within” the rulemaking authority Congress has given the commission.

The Supreme Court’s decision last week to limit the broad regulatory authority of federal agencies could raise legal hurdles for the agency.

As non-compete litigation drags on, some attorneys are advising employers to make greater use of other agreements to protect trade secrets and corporate interests.

In a blog post after the FTC passed the noncompete ban, law firm Winston & Strawn suggested that employers consider alternative measures, such as narrowly tailored confidentiality agreements and a requirement that employees repay the company for the cost of their training if they leave for a certain period of time, known as a TRAP (Training Repayment Agreement).

“There is increasing emphasis on this additional protection,” said Kevin Goldstein, antitrust partner at Winston & Strawn.

But even those agreements are coming under increasing scrutiny. The commission’s final rule includes “de facto noncompetes” — measures that essentially prevent an employee from changing jobs within an industry, even if they aren’t labeled as noncompetes. And employers are watching the changing landscape of state and federal restrictions on such covenants, including nondisclosure agreements, which go beyond the FTC’s rule.

While the commission’s vote to ban non-compete agreements has received the most attention, other federal agencies and state legislatures are also growing in opposition to agreements that restrict worker mobility.

“There is increasing hostility to these agreements 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 agreement is an unfair labor practice as part of her decision in an unfair dismissal case. The judge also broke new ground by banning a non-solicitation agreement, which restricts the solicitation of clients or employees of a former employer, arguing that both types of agreements could stifle protected activities, including union organizing.

That statement followed a memo Last year, Jennifer Abruzzo, general counsel for the Labor Council, clarified her position that non-compete clauses in employment contracts violate the National Labor Relations Act except in limited circumstances.

“It’s one thing to get a 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 labor law. “And it’s another thing to see the adjudication side of the NLRB agree with it.”

According to Harris, these types of restrictive agreements often deter workers from unionizing, “because the consequences of being fired for unionizing are all the greater if you can’t find another job afterwards.”

Other federal agencies have also stepped in, reviewing a range of employment policies that they say unfairly restrict workers. It’s part of the Biden administration’s government-wide crackdown on what it sees as anticompetitive restrictions on worker mobility.

The Consumer Financial Protection Bureau, for example, a report issued last summer about the dangers of provisions that require employees to repay training costs if they leave their jobs for a certain period of time.

It’s not just a federal push: state governments are also stepping in to encourage worker mobility. The trend was already underway before the FTC’s April decision to ban noncompetes, but it has only intensified since then.

Last month, the Rhode Island Legislature passed a bill banning noncompetes, joining Minnesota, California, Oklahoma and North Dakota. Dozens of other states have enacted partial restrictions.

“Minnesota has not turned into a gaping crater,” said Pat Garofalo, director of state and local policy at the American Economic Liberties Project, a progressive think tank, referring to the sweeping ban on non-compete agreements that went into effect last year. “When one domino falls, a whole bunch of other dominoes fall after it.”

State laws also appear to be more resistant to challenge than federal rules.

“The state legislature clearly has a strong interest in getting these rules on the books now,” Mr. Garofalo said.