FTC Appeals Noncompete Ban Ruling

The Federal Trade Commission (FTC) is appealing a federal court ruling that struck down the agency’s proposed ban on most noncompete agreements.

The FTC filed its appeal Oct. 18 to the U.S. Court of Appeals for the 5th Circuit challenging an Aug. 20 decision by the U.S. District Court for the Northern District of Texas that set aside the agency’s rule on noncompetes.

The judge in that case—Ryan LLC v. FTC—ruled that the FTC didn’t have the authority to issue such a broad action and that the rule was arbitrary and capricious.

Judge Ada E. Brown ruled in favor of the plaintiffs in the case: tax services and software provider Ryan LLC; the U.S. Chamber of Commerce; the Business Roundtable; the Texas Association of Business; and the Longview Chamber of Commerce.

The FTC approved the rule in April, stating that noncompete clauses suppress wages and constitute an unfair method of competition. The agency estimated that about 20% of U.S. workers (approximately 30 million people) are bound by a noncompete agreement. The rule had been scheduled to go into effect on Sept. 4.

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

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would have also required employers to provide notice to current and former workers that their noncompete clauses are no longer in effect.

Many business and employer groups, including SHRM, opposed the rule, and lawsuits were quickly filed against the rule when it was announced. SHRM and others filed amicus briefs in support of delaying the rule from going into effect while litigation was ongoing.

Employers that use noncompete agreements typically cite the need to protect trade secrets and other sensitive information from rival firms looking to poach talent.

“SHRM respects the right of the FTC to pursue an appeal in the Ryan LLC v. FTC matter; however, we are optimistic that the court of appeals will reach a similar conclusion and set aside the attempt at a widespread ban on noncompetes,” said Emily M. Dickens, SHRM chief of staff and head of government affairs. “As we have been from the very beginning, we stand ready to continue our advocacy efforts on this issue.”

Dickens said the FTC’s rule imposed a sweeping ban on noncompete agreements, instead of taking a more measured approach. “The FTC’s failure to consider a less restrictive alternative, and the positive impact a fairly crafted noncompete agreement could have, has hurt both workers and the workplace,” she said.

For now, the FTC noncompete ban remains blocked under the district court ruling. Experts have said that employers should continue to focus on state law compliance, conduct a review of their restrictive covenants, and in some cases think about alternatives to noncompete clauses in order to protect trade secrets.