Court Blocks Effective Date of FTC’s Noncompete Rule for Plaintiffs Only

The organizations that sued to block the Federal Trade Commission’s (FTC’s) final rule prohibiting most noncompete agreements from taking effect will not have to abide by the rule until their litigation is resolved, a federal judge ruled July 3.

The U.S. District Court for the Northern District of Texas granted the preliminary injunction and postponed the effective date of the rule for the plaintiffs: Ryan, LLC; the U.S. Chamber of Commerce; the Business Roundtable; the Texas Association of Business; and the Longview Chamber of Commerce. The ruling applies to the organizations as employers; businesses that are members of the groups and associations would still need to follow the FTC’s new noncompete rule when it takes effect Sept. 4, though the judge said the court would rule on the merits of the  rule on or before Aug. 30.

Lawsuits were quickly filed against the rule when it was announced, arguing that the FTC lacks the authority to prohibit noncompete agreements. SHRM and others filed amicus briefs in support of delaying the rule from going into effect while litigation is ongoing.

The FTC’s ban would cover all existing and new noncompete agreements for U.S. workers with exceptions for certain industries (airlines, financial services, and nonprofits) and would prohibit employers from creating new noncompete agreements with “senior executives,” defined as people earning more than $151,164 annually who are in a “policy-making position.”

The rule would also require employers to provide notice to current and former workers that their noncompete clauses are no longer in effect.

Many business and employer groups expressed opposition to the rule, including SHRM.

“Though SHRM would have preferred a nationwide injunction so that HR professionals, business leaders, and workers avoid confusion and ensure smooth business operations while the matter continues to move through the court system, we are happy to know that this matter will be resolved on or before August 30,” SHRM said. “As this litigation progresses, SHRM will continuously identify strategic opportunities for employers’ voices to be heard, ensuring that the perspectives of HR professionals, business leaders, and workers are central in the court’s final decision.”

Searching for Clues

Attorneys are highlighting language in Judge Ada E. Brown’s decision that would seem to point to the rule being struck down.

Erik Weibust, an attorney in the Boston office of Epstein Becker Green, noted that the judge held that the FTC violated the Administrative Procedure Act and exceeded its statutory authority by issuing the ban, which she said has a “substantial likelihood” of being found arbitrary and capricious.

“As expected, the court enjoined the FTC’s noncompete ban, finding that the FTC lacks authority to promulgate the rule,” he said. “The decision is a win for the right of employers to protect their legitimate business interests. I expect the order will be broadened to fully enjoin or invalidate the rule before the effective date.”

The FTC rule is on life support, said Eric Meyer, an attorney in the Philadelphia office of Pierson Ferdinand. He explained that the court concluded that the plaintiffs in the lawsuit successfully established “that they are likely to succeed on the merits, irreparable harm will result without the issuance of injunctive relief, and the balance of harms and public interest weigh in favor of granting injunctive relief.”

Meyer said that the judge reasoned that the FTC has “some authority” to create “housekeeping rules” to preclude unfair methods of competition; however, Congress did not bestow it with “unlimited power” and did not afford the FTC statutory authority to effectively ban most noncompetes.

The court concluded that the rule, “which ‘imposes a one-size-fits-all approach with no end date’ without sufficient consideration of reasonable alternatives, was unreasonably overbroad,” Meyer said. Additionally, Brown brought up “the Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition ... instead of targeting specific, harmful noncompetes,” rendering the rule arbitrary and capricious.

“The court blocked the rule because, otherwise, the plaintiff would endure nonrecoverable costs of complying with a putatively invalid regulation and, thus, endure irreparable harm,” Meyer said.

FTC spokesperson Douglas Farrar responded to the judge’s decision with the statement that “The FTC stands by our clear authority, supported by statute and precedent, to issue this rule. We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty.”

Employers are advised to continue to monitor the progress of the legal challenges to the FTC’s rule and maintain the status quo until the fate of the rule is decided. Legal experts believe that the district court’s decision will be appealed regardless of the outcome and the issue will likely eventually end up before the U.S. Supreme Court.

“In the meantime, another case like this one is pending in the Eastern District of Pennsylvania, where the judge will rule on a similar injunction request by July 23,” Meyer said.