Lawsuit Challenging FTC Rule Banning Non-Compete Agreements May Delay Implementation of Rule
June 24, 2024
By: Colin A. Walker
The U.S. Chamber of Commerce and others have filed a lawsuit challenging the FTC’s recent rule banning non-compete agreements. The case is likely to at least delay implementation of the rule, and could invalidate it, sending the FTC “back to the drawing board” with its efforts to curtail the enforceability of non-compete agreements.
Non-compete agreements have long been subject to scrutiny by legislatures and courts because of their anti-competitive impact. On the other hand, many employers feel they are legitimate methods for protecting confidential and proprietary information, as well as customer relationships that they have developed over many years.
The new FTC rule, which is scheduled to take effect on September 4, 2024, would invalidate all non-compete agreements in the future (except those related to the purchase and sale of a business) and would invalidate all existing non-compete agreements except those applicable to “senior executives” in “policy-making” positions who earn more than $151,164 per year (See: April 24, 2024 blog post here). It is unclear the extent to which the rule would invalidate other restrictive covenants, such as non-solicitation agreements.
Controversial new regulations often result in lawsuits challenging their validity. Famously, a regulation proposed by the U.S. Department of Labor under the Obama Administration which would have increased the salary threshold for “exempt” employees (those who can be paid by salary rather than hourly with overtime) was challenged. While the case was pending, however, President Trump was elected and the Department of Labor under his leadership quickly withdrew the proposed rule. Similarly, the U.S. Chamber of Commerce and others have filed a lawsuit in the United States District Court for the Northern District Texas arguing that the new non-compete rule is invalid.
The plaintiffs argue that the FTC exceeded its authority. Generally, an agency, such as the FTC, implements regulations interpreting and administering legislation enacted by Congress, but it does not create laws. That is the exclusive province of Congress. However, there is often a “fine line” between a regulation and a law. The plaintiffs argue that the FTC crossed that line because no law specifically allows it to regulate non-compete agreements. The FTC argues that Congress has given it the authority to regulate “unfair or deceptive acts or practices” and that the non-compete rule is logically included within that authority. The plaintiffs also argue that the FTC’s new rule is “arbitrary and capricious” because, they allege, its analysis of the data supporting the new rule is flawed and it did not consider other less onerous alternatives, such as minimum compensation limits, limiting enforceability to employees with access to trade secrets, and prohibiting non-compete agreements in certain sensitive industries. The court will have to rule on these issues, but that will involve lengthy briefing on the arguments, a hearing, and it is likely that a ruling will not be issued for many months. Once a ruling is issued, the parties will have an opportunity to appeal, which would cause further delays. In the meantime, the presidential election is right around the corner and the world wonders if Donald Trump would withdraw the rule, as he did the Department of Labor’s salary threshold rule, if he were to be elected.
The immediate question is whether the new rule will go into effect as scheduled on September 4, 2024. The plaintiffs filed a motion to stay implementation of the regulation pending a decision by the court. The FTC has responded and the motion is now ripe for a decision on the stay buy the court. While a stay (preliminary injunction) would not affect the final decision, technically, it would indicate that the judge thinks the plaintiffs have a good chance of prevailing on the merits.