In a highly-anticipated federal ruling on July 3, US District Court Judge Ada Brown determined that the US Federal Trade Commission (FTC) did not have the authority to issue a nationwide ban of non-compete agreements. Although the judge’s decision was preliminary, employment lawyers watching the case agree that the FTC non-compete move is effectively dead.
Brown, of the US District Court for the Northern District of Texas, said that she would issue a final ruling on Aug. 30, the day before the FTC ban was slated to take effect. But based on the strong wording of her preliminary decision, there seemed little doubt that she would ultimately block the ban.
The case will likely be appealed to the US Supreme Court, but that court’s recent decision setting aside the so-called Chevron deference makes observers doubt that the court won’t support the FTC block.
“Regardless of when the FTC appeals, the Supreme Court’s recent Loper Bright decision handed down on June 28, 2024 is expected to make an FTC appeal or ultimate success on the merits more challenging,” said an analysis of the case posted by the White & Case law firm. “Loper Bright overruled long-standing precedent under which courts afford deference to a federal agency’s interpretation of its own power, known as Chevron deference. Without Chevron deference now, the FTC’s legal arguments in support of its authority to promulgate the rule are on equal footing as the plaintiffs arguing that the FTC overstepped.”
The judge’s ruling elaborated on that.
“States have historically regulated non-competes through caselaw and statute. Texas courts have enforced reasonable covenants not to compete dating back at least to 1899,” Brown wrote. “No federal law broadly addresses the enforceability of non-competes.”
“The Court finds there is a substantial likelihood the rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. It imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made,” Brown said.
“No state has ever enacted a non-compete rule as broad as the FTC’s NonCompete Rule. Further, the FTC’s evidence compares different states’ approaches to enforcing non-competes based on the specific factual situation—completely inapposite from the FTC imposing a categorical ban,” the decision said. “The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the rule arbitrary and capricious.”
Congress could act, but will it?
The judge stressed that she saw the proper avenue for such a restriction falling to Congress, not a government agency. Lawyers watching the case doubted that such legislation would be likely to happen.
“If congress had the desire to ban non-competes, they could have done so years ago,” said Texas lawyer Omar Ochoa, who specializes in employment law cases involving non-competes.
Another employment lawyer, Tom Spiggle of Alexandria, Virginia, agreed that congressional action is highly unlikely. “I don’t think there’s the political appetite of actually getting something passed. A lot of small businesses like these non-competes,” he said.
About one in five US workers, or 30 million people, have signed non-compete agreements, according to the FTC. Such agreements typically prevent them from working for a competitor or launching a competing business of their own within a certain area and a certain time after leaving the original employer.
The political dynamics of legislatively dealing with non-competes make it unappealing to members of Congress. The move is favorable to employees—and there are more of them, so those are potential votes. But employers like non-competes and they can spend money via lobbying to help members get elected. In a choice of money versus votes, Capitol Hill favors money.
Other obstacles to non-competes
That said, the death of a federal ban on non-competes is only half of the story. About a half-dozen states—including California, Rhode Island, Minnesota, and Washington, DC, have banned non-competes, whereas several other states—including Illinois, Massachusetts and Nevada —have sharply limited when they can be enforced, said Mark Goldstein, a partner in the New York law firm ReedSmith, where he specializes in employment law.
“It’s a bit of a patchwork depending on where you are in the country,” Goldstein said, adding that states and courts differ on whether those state laws speak to the state where the employee works or where the company is based.
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