With noncompete ban in limbo, what’s next?

A Federal Trade Commission (FTC) rule that would ban most noncompete agreements with employees was scheduled to take effect on September 4.

Instead, after a recent U.S. District Court decision that nixed the rule, employers wait to see whether the ruling will be appealed or retired for good.

The FTC ban 

The FTC’s rule would have prohibited noncompetes nationwide. In addition, existing noncompetes for most workers would no longer be enforceable after it became effective. The rule was expected to affect 30 million workers.

The rule includes an exception for existing noncompete agreements with senior executives, defined as workers earning more than $151,164 annually who are in policy-making positions. Those positions include:

• A company president, chief executive officer, or equivalent
• Any other officer who has policy-making authority
• Any other person who has policy-making authority similar to an officer with such authority

Employers couldn’t enter new noncompetes with senior executives under the new rule.

Unlike an earlier proposed rule issued for public comment in January 2023, the final rule didn’t require employers to legally modify existing noncompetes by formally rescinding them. Instead, they were required only to provide notice to workers bound by an existing agreement — other than senior executives — that they wouldn’t enforce such agreements against the workers.

Legal challenges

On the day the FTC announced the new rule, a Texas tax services firm filed a lawsuit challenging the rule in the Northern District of Texas (Ryan, LLC v. Federal Trade Commission). The U.S. Chamber of Commerce and similar industry groups joined the suit in support of the plaintiff. Additional lawsuits were filed in the Eastern District of Pennsylvania (ATS Tree Services, LLC v. Federal Trade Commission) and the Middle District of Florida (Properties of the Villages, Inc. v. Federal Trade Commission).

The Ryan case was actually the last of the three cases to reach judgment. On August 20, 2024, the U.S. District Court for the Northern District of Texas held that the FTC exceeded its authority in implementing the rule and that the rule was arbitrary and capricious. It further held that the FTC cannot enforce the ban, a ruling that applies on a nationwide basis.

Earlier, in the ATS Tree Services case, the U.S. District Court for the Eastern District of Pennsylvania denied the plaintiff’s request for a preliminary injunction and stay of the rule’s effective date. It found the plaintiff didn’t establish that it was reasonably likely to succeed in its argument against the ban.

In the Properties of the Villages case, the U.S. District Court for the Middle District of Florida granted the plaintiff a preliminary injunction and stay. That plaintiff requested relief only for itself, so the ruling had no nationwide impact.

An FTC appeal would go before the conservative U.S. Court of Appeals for the Fifth Circuit, which has become a favorite destination for challenges to President Biden’s policies. Although the court often sides with the challengers, it’s frequently been reversed by the U.S. Supreme Court.

An appeal could face an uphill battle, though, considering a recent Supreme Court ruling that reversed the longstanding doctrine of “Chevron deference.” Under that precedent, courts gave deference to federal agencies’ interpretations of the laws they administer. According to the new ruling, however, it’s now up to courts to decide “whether the law means what the agency says.”

The bottom line

For now, the FTC’s noncompete ban remains in limbo and won’t take effect on September 4, 2024. But that doesn’t mean noncompetes are safe. For example, some private parties are using anti-trust laws to challenge such agreements. And an FTC spokesperson has indicated that the Ryan ruling won’t deter the agency “from addressing noncompetes through case-by-case enforcement actions.”

© 2024 KraftCPAs PLLC