Challenges to Non-compete Ban Already Hitting Courts

The first legal challenges to the Federal Trade Commission’s (FTC’s) nationwide ban on non-competes are flooding in from business groups claiming the commission overstepped its authority a week ago by approving the new regulation.

The U.S. Chamber of Commerce, which was promising to challenge the restriction even before the commission’s 3-2 vote approving it, filed the first lawsuit in the Eastern District of Texas, followed closely by the tax services firm Ryan LLC in the Northern District. The chamber was joined in its lawsuit by the Business Roundtable, which is an association of CEOs from many of the nation’s largest companies, and the Texas Association of Business.

Mark Lemley, a Stanford law professor who has written extensively on non-competes and strongly believes that bans foster innovation, said the FTC prohibition “is great public policy that will improve both innovation and the lives of workers” and that “the evidence in support of it is overwhelming.”

But he said that whether the FTC is exceeding its authority is a different matter. “The power of the FTC to enact it is less clear,” he said.

The regulation bans companies from enforcing existing non-competes against any worker except their most senior executives, defined as those who have a “policymaking position” and earn more than $151,164 a year. It also prohibits imposing non-competes on any senior executives in the future.

In a statement, FTC Chair Lina Khan declared: “Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism.”

The FTC stopped short of categorically outlawing other types of restrictive agreements, such as non-disclosure agreements, as they generally don’t penalize or forbid workers from switching employers.

Yet the agency said employers using non-disclosure agreements can run afoul of the new regulation if the agreements “adopt a term or condition that is so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends.”

Jason Tremblay, a partner at Saul Ewing and vice chair of its labor and employment practice, expressed discomfort with the phrase “broad or onerous,” saying, “these terms are ambiguous by their very nature” and, as a result, are sure to fuel even more litigation.

“They’re subject to dispute and interpretation, and are very fact-specific. That’s one of the concerns that a lot of those that are against the FTC rule are expressing: There’s no clarity here,” he said.

The retroactive nature of the ban is also logistically problematic, given the broad use of non-competes, Tremblay said. The FTC estimates that roughly 30 million American workers are bound by one.

“You have states that require consideration and bonuses to be paid in order to have these agreements. This rule invalidates these retroactively,” he said. “How can you invalidate something that’s already been entered into by two parties? And what are the economic consequences of that? So I think it’s a fascinating issue. It’s not going away, and we’re not going to have any real answers on how this is going to unfold.”

The ban is set to take effect in 120 days, though legal experts widely predict that the challenges will, at a minimum, delay implementation or, at a maximum, prevent that day from ever coming.

The commission has long acted as an enforcement agency, investigating and suing companies that it believes have violated laws and regulations on a case-by-case basis. Former FTC Commissioner Terrell McSweeny, now a senior of counsel at Covington & Burling, told Law.com earlier this week that the agency’s non-compete rule represents a “potential expansion” of its powers to police unfair competition contained in the Federal Trade Commission Act.

While Section 6(g) of the act gives the agency authority “from time to time” to “make rules and regulations” that prevent unfair methods of competition, business groups say this provision doesn’t come close to granting the FTC authority to adopt a rule with the magnitude of the non-compete ban.

“To promulgate such sweeping rules, an agency must have clear and unmistakable authority,” Ryan LLC argues in its suit. “The modest powers afforded the Commission in Section 6(g) do not come close to that standard.” It characterizes the new rule as a “brazen power grab” by a “politically unaccountable ‘independent’ agency that is unconstitutionally insulated” from being removed by the president.

The chamber put its objections somewhat less sharply, writing, “Under the Administrative Procedure Act, a choice to fundamentally remake the American economy requires substantial factual support. But here, the Commission has opted for an unprecedented and extreme policy, without pointing to any economic evidence that supports that decision.”

Speaking at last Tuesday’s meeting where commissioners adopted the rule, Khan disagreed. The Federal Trade Commission Act “clearly gives the agency the authority to promulgate rules addressing unfair methods of competition,” and “arguing that the FTC lacks this authority requires ignoring the most straightforward reading of the text,” she said.

Lemley said Section 5 of the Federal Trade Commission Act has historically been interpreted to restrict unfair trade practices, “but the power of the FTC has been under attack in the courts, and a right-wing court may use this as an opportunity to cut back the agency’s power further.”

Tremblay, the Saul Ewing partner, said the outcome of the challenges will come down to how the courts interpret the statutory language and how the FTC has approached its mandate historically.

The impact of the regulation on business and the larger economy also will come into play, Tremblay said. “If you take this to its natural extension, the FTC is invalidating hundreds and hundreds of years of a common law, of statutes being implemented on this topic. And that has what’s called a ‘major effect,’” he said.

For now, Tremblay is telling clients, “Don’t panic, and be patient” as the lawsuits play out.

But they should be scrutinizing their existing agreements—and not just because of the FTC’s ban. A growing number of states also have begun looking askance at non-competes, with California, Colorado, Minnesota, North Dakota, and Oklahoma among the states prohibiting or severely restricting them.

“We live in a world that is becoming more difficult to enforce non-competes as they are done now,” he said. “I’m telling them to re-look at their agreements. Even if the FTC final rule doesn’t come into effect, are there other steps that they can do to narrow and revisit those existing restrictions to make them more narrowly tailored and reasonable.”

From: BenefitsPRO