A federal judge on Wednesday backed an initial legal challenge to the Federal Trade Commission's ban on noncompete agreements, which is set to take effect in September.
Judge Ada Brown granted an injunction sought by several plaintiffs, saying the ban cannot be enforced against them until a final ruling is obtained.
But while the ruling is preliminary, he said the FTC lacked “substantive rulemaking authority” regarding unfair methods of competition 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 expected to issue a final decision by the end of August.
The commission “stands firm in its 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” noncompete clauses in an effort to promote worker mobility and economic growth.
In April, the law firm Ryan LLC filed a lawsuit seeking to block the near-total ban on noncompete clauses, just hours after the FTC voted 3-2 to adopt the rule. The U.S. Chamber of Commerce later joined the case as a plaintiff, as did the Business Roundtable and two Texas business groups.
Banning noncompete agreements, which prohibit workers from changing jobs within an industry, would boost worker income by at least $400 billion over the next decade, the FTC estimates. The agreements affect about one in five American workers, or about 30 million people, according to the agency, whose purview includes antitrust and consumer protection issues.
“If you're not working in the most productive place you could be because of a noncompete clause, 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 the ban would limit their ability to protect trade secrets and confidential information. The Chamber of Commerce and other groups say the FTC lacks constitutional and statutory authority to adopt the proposed rule, and Ryan LLC calls 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 maintain that the commission can legally issue rules defining methods of unfair competition under the FTC Act of 1914, the law that created the agency. Their position has also garnered some bipartisan support: Rep. Matt Gaetz, R-Fla., argued in a brief filed in the Texas case that banning competition falls “squarely within” the commission’s rulemaking authority granted by Congress.
The Supreme Court's decision last week to limit the broad regulatory power of federal agencies could increase the agency's legal hurdles.
Mark Goldstein, a labor and employment attorney with Reed Smith in New York, said that while it is limited to plaintiffs only at this stage, Judge Brown's injunction is a strong indication that she will deem the FTC rule invalid, preventing it from taking effect nationwide.
“In this case, the path is written,” Goldstein said. “I have never seen a court issue a preliminary injunction and then, barring extremely unusual circumstances, issue a final decision that is inconsistent with the preliminary injunction.”
As litigation over the non-compete rule drags on, some attorneys are already advising employers to begin relying more on different agreements to protect trade secrets and business interests.
In a blog post after the FTC adopted its noncompete ban, the law firm Winston & Strawn suggested that employers adopt alternative measures, such as specifically tailored confidentiality agreements and requirements that employees reimburse the company for training costs if they leave before a set period, known as training reimbursement agreement provisions, or TRAPs.
“The focus on these additional protections has become greater,” said Kevin Goldstein, an antitrust partner at Winston & Strawn.
But even those agreements are under increasing scrutiny. The commission’s final rule covers “de facto noncompete clauses” — measures that, in effect, prevent a worker from changing jobs within an industry, even if they are not labeled as noncompete clauses. And employers are eyeing the changing landscape of state and federal restrictions on such arrangements, including confidentiality agreements, beyond the FTC rule.
While the commission's vote to ban noncompete agreements has drawn the most attention, other federal agencies and state legislatures are also increasingly cracking down on agreements that restrict worker mobility.
“There's been growing hostility toward 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 noncompete 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 nonsolicitation clause, which restricts soliciting customers or employees of a former employer; she argued that both types of agreements could cripple protected activity, including union organizing.
This ruling came after memorandum Last year, labor board general counsel Jennifer Abruzzo clarified her view that non-compete clauses in employment 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 meaningful and important,” said Jonathan F. Harris, an associate professor at Loyola Law School in Los Angeles who studies contracts and employment law. “It’s another thing to see that the NLRB’s arbitration department agrees with it.”
These kinds of restrictive agreements tend to scare workers away from organizing, Harris said, “because the consequences of being fired for organizing become much greater if you can’t get another job afterward.”
Other federal agencies have also joined the effort, considering a range of labor provisions they say unfairly restrict workers. It’s part of the Biden administration’s government-wide strategy to address what it sees as anticompetitive restrictions on worker mobility.
The Consumer Financial Protection Bureau, for example, issued a report Last summer there was talk of the dangers of provisions requiring workers to repay training costs if they leave a job before a certain time has elapsed.
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 noncompete clauses in April but has gained momentum since then.
Last month, the Rhode Island legislature passed a bill to ban non-compete clauses, joining Minnesota, California, Oklahoma and North Dakota. Dozens of other states have enacted partial restrictions.
“Minnesota didn’t turn into a giant 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 noncompete clauses that went into effect last year. “Once one domino falls, a lot of others fall after it.”
State laws may also prove more resistant to challenges than federal rules.
“State legislatures obviously have a very strong interest in getting these rules passed right now,” Garofalo said.
