Businesses left in legal limbo with FTC noncompete ban
Employers need to start planning for compliance with the FTC noncompete ban, effective Sept. 4, despite uncertainty around whether the rule will hold up in court.
A Texas U.S. District Court will issue a final ruling at the end of August on whether to grant a permanent injunction against the Federal Trade Commission's ban on noncompete agreements, leaving most businesses in uncertainty until then.
Tax firm Ryan LLC and business associations including the U.S. Chamber of Commerce sued the FTC in April over its noncompete ban. Earlier this month, U.S. District Court Judge Ada Brown of the Northern District of Texas granted Ryan and plaintiff intervenors in the lawsuit a preliminary injunction against the FTC's noncompete ban. The court agreed with the plaintiffs' argument that the FTC lacks authority to create such a rule.
But the court limited its preliminary ruling to the specific entities in the lawsuit rather than granting a nationwide injunction. That means all other employers will need to comply with the noncompete ban by the effective date of Sept. 4, unless the court's final decision on or before Aug. 30 changes things.
Jesse Coleman, a partner at law firm Seyfarth Shaw, said the ruling creates a "tremendous challenge" for employers. Since the court could issue a ruling just five days before the ban's effective date, it will be difficult for businesses to implement compliance plans without knowing whether the FTC's rule will stand.
"You've left the entire business world jumping through a host of hoops between now and Aug. 30 in order to be ready to comply with a rule that likely will not apply to them," Coleman said.
The plaintiffs' legal teams filed a motion this week for reconsideration to expand the scope of the ruling to all businesses affected by the FTC's noncompete ban, but the motion was denied.
"Right now, we have in place the necessary reasoning for the noncompete ban to be struck down, but we don't have the ruling," Coleman said. "It's a strange legal purgatory for tens of thousands of employers across the country to be in where it's very likely the court's ultimate ruling is going to be one that directly impacts them, but it doesn't currently."
The FTC noncompete ban adopted earlier this year will prevent most employers from using noncompete clauses and will require companies to end existing noncompete agreements except for those with senior executives. Outside the Texas court's challenge, the FTC's noncompete ban is facing legal challenges on other fronts, including in the Eastern District of Pennsylvania. It will likely continue to face lawsuits going forward, especially given the recent Supreme Court rulings that put not only the FTC, but other enforcement agencies' rulemaking authority in question, said Melody Morehouse, director of conversation compliance at Gryphon.ai, an AI platform focused on compliance.
"The example of the FTC's recent noncompete ban is on shaky ground, as the ability of the FTC to even instate a rule like this is called into question," she said. "Not knowing whether the noncompete ban can still be enforced leaves businesses managing this uncertainty around workforce planning."
Businesses will need to assess noncompete policies
The U.S. Supreme Court decided three different cases at the end of June and earlier this month that affect federal agencies' rulemaking ability and opened the door to challenges from businesses that disagree with agency rules.
Those rulings are already affecting the case against the FTC noncompete ban, said John Siegal, a partner at law firm BakerHostetler. He pointed out that in granting the preliminary injunction, the Texas court relied on the Supreme Court's recent case Loper Bright Enterprises v. Raimondo, which reversed the Chevron deference that gave latitude to federal agencies' interpretation of laws they administer.
What it means is there's great uncertainty for people and companies who are trying to anticipate how they will deal with this rule.
John SiegalPartner, BakerHostetler
Generally, a court that grants a preliminary injunction will likely grant a permanent injunction in the final ruling, so there's an expectation that the court will rule in favor of the plaintiffs at the end of August, Siegal said. Still, the Texas court's denial this week of the motion for reconsideration has made it clear that it won't grant relief to any parties beyond the named plaintiffs, he added.
Siegal said he expects continued uncertainty in the business world, as well as employers assessing the necessity of their noncompete agreements -- particularly when there are other, less restrictive agreements that don't fall under legal scrutiny and can still protect a company's interests.
"What it means is there's great uncertainty for people and companies who are trying to anticipate how they will deal with this rule," he said. "It's an unusual situation in which there's a court order finding that the FTC exceeded its authority, but that doesn't apply to most employers in the country who might be subject to FTC actions."
Makenzie Holland is a senior news writer covering big tech and federal regulation. Prior to joining TechTarget Editorial, she was a general assignment reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.
